MAS policy shift likely in April if growth still robust: Analysts

Economists say the Monetary Authority of Singapore's latest policy statement strikes a more upbeat note about Singapore's economic prospects and could point to a policy shift next April.
Economists say the Monetary Authority of Singapore's latest policy statement strikes a more upbeat note about Singapore's economic prospects and could point to a policy shift next April. PHOTO: REUTERS

Its latest statement seen as more upbeat about economic prospects

The Monetary Authority of Singapore (MAS) opted to stand pat on its exchange rate policy even though third-quarter economic growth came in at its fastest pace in more than three years.

But economists say the MAS' latest policy statement strikes a more upbeat note about Singapore's economic prospects and could point to a policy shift next April.

The economy expanded 4.6 per cent in the third quarter compared with the same period a year earlier, beating economists' forecasts of 3.8 per cent growth and also the fastest quarterly expansion since 2014.

Alongside these numbers, the MAS' latest monetary policy statement - also out yesterday - announced that the central bank is keeping its policy stance unchanged. The central bank uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth. The rate is allowed to float within a policy band that can be adjusted when monetary policy is reviewed.

A stronger currency - which corresponds to tighter monetary policy - counters inflation by making imports cheaper in Singdollar terms, while a weaker Singdollar helps to lift growth by making exports cheaper abroad. The exchange rate is managed against a basket of currencies of Singapore's major trading partners.

The Singdollar policy band is now on a path of zero appreciation against the currencies of key trading partners - a "neutral" policy stance put in place in April last year amid slow growth and low inflation. Now that growth has picked up, some economists had expected the central bank to tighten policy. It opted to stand pat, but offered some hints in its policy statement yesterday on the outlook.

The MAS referred to comments it made in October 2016 that the neutral policy stance would be appropriate for an "extended period". But it did not explicitly repeat the phrase in its latest statement.

The economy expanded 4.6 per cent in the third quarter compared with the same period a year earlier, beating economists' forecasts of 3.8 per cent growth and also the fastest quarterly expansion since 2014.

This means the central bank saw "no need to jump the gun on tightening now, even as it leaves the adjustment window open in 2018", said OCBC economist Selena Ling.

"The window for any MAS monetary policy adjustment remains open in April and October 2018 depending on how the economic and price stability picture evolves over the next six months, especially with the G-7 central banks increasingly jumping on the policy normalisation bandwagon," she added.

CIMB Private Bank economist Song Seng Wun said the MAS is likely to tweak its stance in April if economic growth remains strong in the coming quarters. "Labour market sentiment and hiring seem to have picked up. Growth momentum will probably be sustained into the first half of next year, with more sectors beyond the obvious ones seeing stronger growth," he noted.

A version of this article appeared in the print edition of The Straits Times on October 14, 2017, with the headline 'MAS policy shift likely in April if growth still robust: Analysts'. Print Edition | Subscribe