We previously flagged that the MAS will look to tighten one last time by slightly increasing the slope of the Singapore Dollar Nominal Effective Exchange Rate (SGD NEER). This makes the SGD appreciate relative to other currencies, keeping imported inflation and import costs low.
However, we now see the MAS maintaining current policy settings until October. This is based on our recently-updated view that the Fed will maintain policy rates instead of hiking further. Many central banks—including India and New Zealand in Asia—have turned dovish as well.
MAS may wait six more months to see how global trade trends turn out. We currently expect a weak quarter of GDP growth in Q1 due to China’s slowdown, the impact of the Lunar New Year holiday and trade policy uncertainties between the U.S. and China.
At the same time, some government initiatives will help to push core inflation temporarily downwards. These have little impact on underlying inflation though, which in our view remains a pressure point. The Merdeka Generation Package is similar to the Pioneer Generation Package announced in 2015, and will likely dampen health inflation in the coming months. Similarly, we expect restructuring in the electricity market to push electricity prices downwards.
Even if MAS maintains policy settings for now, SGD may remain an outperformer with limited upside. This is due to its continued (modest) appreciation stance, as global central banks (including the Fed) become more dovish.
Figure 1: Core Inflation (% y/y)
Source: CEIC, Continuum Economics