Asia/Pacific September 14, 2018 / 02:32 pm UTC

Monetary Authority of Singapore Likely to Tighten Further in October

By Jeff Ng

Bottom line: We expect the Monetary Authority of Singapore (MAS) to tighten monetary policy and increase the slope of the Singapore dollar nominal effective exchange rate (SGD NEER) in mid-October. MAS has likely priced in downside risks to trade, but will now also be wary of rising inflation. We therefore expect SGD to be a relative outperformer among EM currencies

Figure 1: SGD NEER Is Near its Top Boundary Due to Expectations of Further Tightening in October

Source: CEIC, Continuum Economics

Next MAS Move Most Likely in October 

We believe that the MAS will repeat its action in April, when it slightly increased the slope of the SGD NEER from a no-appreciation stance to around a 0.5% appreciation per annum (according to our current estimates). In October, we expect the SGD NEER slope to tighten to around a 1% increase per annum. 

The most likely alternative scenario is that the MAS delays the increase of the slope to next year, possibly April. Other scenarios are less likely. The MAS is not inclined to widen the range of the SGD NEER, as market conditions have not been extremely volatile. At the same time, re-centering the SGD NEER, which has drifted toward the top of its range in anticipation of the MAS’ likely move in October (Figure 1), may destabilize SGD movements. 

Should the MAS increase the slope of the SGD NEER again in October, we believe further moves are unlikely in 2019. Firstly, a 1% increase in the SGD NEER every year may be fundamentally congruent with a neutral stance for Singapore’s exchange rate monetary policy, due to a slowing trend growth rate. Secondly, inflation has been relatively manageable, and the MAS is likely to move the slope higher in 2019 only if inflation is above 3% for some time. Finally, we believe downside risks to trade are likely to materialize further in 2019, which will put pressure on export growth in the trade-open economy. 

Slightly Positive Economic Outlook 

Singapore’s economic metrics have remained resilient in 2018 and do not appear to be constraining the Bank’s monetary policy. However, a slowdown in headline growth numbers, mostly from base effects, is widely anticipated. Also, although the manufacturing sector has remained a key pillar of support in recent months, bolstered by a return of energy-related industry growth (Figure 2), recent reforms mean the property sector is likely to cool alongside industry activity such as construction and related demand-side components like private consumption.

Trade remains a risk, and was one of the reasons for the MAS’ cautious tightening at its April meeting. In our view, electronics, among other sectors, will continue to be dampened by supply-chain disruptions caused by U.S.-China trade tensions.

Regarding inflation, we are becoming slightly concerned about underlying price pressures. In July, core inflation reached the highest levels seen since 2014 (Figure 3). We forecast core inflation at 1.7% in 2018 and 1.8% in 2019. The MAS also expects imported inflation, wage increases and domestic demand to fuel some inflationary pressures. Furthermore, housing and transport inflation are likely to reduce their drag on headline inflation. 

Impact on SGD and Sibor

The positive slope of the SGD NEER means that Singapore wants SGD to appreciate against its trade-weighted basket of currencies, including USD. We therefore expect SGD to be resilient against a strong USD, but to strengthen compared to other regional currencies, particularly CNY. We forecast USDSGD at 1.36 at end-2018 and 1.33 at end-2019. The expected appreciation in the SGD should limit Sibor increases, limiting risks to the domestic economy and regarding leverage. We forecast the three-month Sibor to reach 1.90% by end-2018 and 2.25% by end-2019

Figures 2 and 3: Industrial Production Drivers Are Changing as Inflation Picks Up (% y/y)

Source: CEIC, Continuum Economics

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Analyst Certification
I, Jeff Ng, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.