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