Singapore’s MAS Holds Policy Stance While Softening Dovish Tone

(Bloomberg) -- Singapore’s central bank kept its main monetary settings unchanged, while signaling a slightly less dovish tone going forward as it cautiously eyes a brighter recovery from the pandemic.

While repeating its previous guidance that “that an accommodative policy stance remains appropriate,” the Monetary Authority of Singapore statement dropped the phrase “for some time.” It also said it expects economic growth to outpace its earlier expectations and noted a gradual pick-up in inflation.

The MAS, which manages the exchange rate of the local dollar as its main monetary tool, held the slope, width and center of its currency band unchanged Wednesday, as expected in a Bloomberg survey. The slope is currently 0%, a policy that implies the MAS isn’t seeking currency appreciation, which it implemented at the outset of the pandemic last year.

As a small city-state highly exposed to trade, Singapore offers a window into the global economic outlook, which is improving as vaccination drives get underway and fiscal and monetary stimulus filters through to businesses and consumers. The MAS pointed to a firming in domestic trade-related and modern services sectors, even as travel restrictions continue to hold back demand for leisure and hospitality.

“The Singapore economy will grow at an above-trend pace this year, but the sectors worst hit by the crisis will continue to face significant demand shortfalls,” the central bank said in its statement. “As core inflation is expected to stay low this year, MAS assesses that an accommodative policy stance remains appropriate.”

All 17 economists surveyed predicted no changes to the policy band, which the MAS uses to guide the local dollar against a trade-weighted basket of currencies. Rather than using interest rates to maintain price stability, it adjusts the slope, or pace of appreciation, as well as the width and center of the currency band. It doesn’t disclose the details of these components.

‘Touch’ Hawkish

The Singapore dollar gained 0.2% against the U.S. dollar to 1.3383 as of 8:51 a.m., although in trade-weighted terms the gain was about 0.1%, according to a model from ANZ.

The MAS statement represents “a nuanced calibration to a less aggressively dovish position,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “In essence the MAS is shifting to a more state-dependent policy accommodation that will balance between uneven but ‘above-trend’ pace of recovery this year.”

What Bloomberg Economics Says...

“The days appear to be numbered for the MAS’s neutral currency bias, with the central bank no longer indicating that an accommodative policy stance would ‘remain appropriate for some time.’ Assuming sustained progress in global Covid-19 inoculation, we still expect the MAS to return to a gradual appreciation bias in the Singapore dollar against trading partners at its next policy meeting in October, from zero currently.”

-- Tamara Henderson, Asean economist

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd., described the statement as “a touch hawkish” because of the absence of a time-based reference for the policy settings.

“It’s clear that the next policy move will be a tightening,” he said. The statement “leaves the door open for a potential move in October. But I am still of the view that the earliest move would be April next year.”

GDP Growth

The decision was announced at the same time as government data showing gross domestic product grew 0.2% in the first quarter from a year ago, after falling 2.4% in the previous three months.

On a non-annualized basis, GDP in the first quarter rose a seasonally adjusted 2.0% from the previous three months.

Barring a setback to the global economy, this year’s GDP growth is likely to exceed the upper end of the official 4%–6% forecast range, the MAS said, without providing a new range. However, the central bank said significant uncertainties remain -- including potential virus mutations and premature relaxation of social restrictions by governments -- which could derail the recovery.

The fact that the authority flagged GDP above the upper end of the forecast, but didn’t give a revised range, “is potentially a less dovish/more hawkish hint going ahead for the October monetary policy statement,” said Selena Ling, head of Treasury research and strategy at Oversea-Chinese Banking Corp. in Singapore. “The open-ended statement could also be attributable to the uncertainties pertaining to vaccination progress” and the resumption of international travel.

Price Pressures

Core inflation is expected to rise in coming months amid producer price pressures in major economies, the central bank said, reiterating its 0%-1% forecast for the full year. It raised its all-items inflation forecast for the year to 0.5% to 1.5%, from a previous forecast of -0.5% to 0.5%.

The MAS also left the policy settings unchanged last October, after it had taken unprecedented easing steps in March 2020. Fiscal stimulus has done much of the heavy lifting for the recovery, with the government announcing programs worth about S$100 billion ($75 billion) to support businesses and workers.

More details from the first-quarter GDP report:

• Manufacturing expanded 7.5% in the first quarter from the same period in 2020 after growing 10.3% in the previous three months
• Construction contracted 20.2% year-on-year in the three months through March after declining 27.4% in the fourth quarter of 2020
• Services industries shrank 1.2% after declining 4.7% year-on-year in the fourth quarter

Despite the bullish outlook for GDP, the MAS “equally stressed the lingering slack in labor markets and continued headwinds faced by certain domestic industries, a clear sign that there is no rush to normalize monetary policy for now,” said Joseph Incalcaterra, chief Asean economist at HSBC Holdings Plc in Hong Kong. However, “we think the MAS will be one of the first regional central banks to start normalizing policy in 2022 based on the strength of the country’s medium-term growth outlook.”

©2021 Bloomberg L.P.