News analysis

All eyes on MAS after hawkish Fed rate hike deals blow to Sing$

Experts split on whether Singapore's central bank will continue to tighten monetary policy

Singapore stocks ended flat and its currency retreated to a 29-month low against the US dollar after the Federal Reserve signalled that it would raise interest rates to a higher level than it had earlier indicated.

While most analysts still believe the Monetary Authority of Singapore (MAS) will make another tightening move in October, some doubts are now emerging on how aggressive the move will be.

The United States central bank raised the Fed funds rate by 75 basis points, or 0.75 percentage point, on Wednesday to a new target range of 3 per cent to 3.25 per cent - the highest since 2008.

Analysts said the more important indication of the Fed's hawkish approach to quell inflation running near a four-decade high was its median forecast for the funds rate that was lifted to 4.4 per cent for 2022 and 4.6 per cent for 2023.

That implies the Fed will hike interest rates by more than 1 per cent by the end of this year.

The higher rate plan raised fears of a significant economic growth decline, pulling the US S&P 500 stock index down by 1.7 per cent and pushing the two-year Treasury bill yield up to 4.02 per cent, the highest since 2007.

Dr Taimur Baig, DBS Bank's chief economist, said: "The key message in the Fed decision was not the widely expected, unanimously voted 75 basis points rate hike. Instead, it was the extraordinary ratcheting up of hawkishness."

He said the Fed's overly aggressive stance was unexpected, given that growth projections worldwide have been revised down in recent months, commodity and shipping prices have corrected considerably, and interest rates are already above what is widely considered to be the neutral rate.

Asian markets were also in turmoil on Thursday morning, with investors wondering how the region's economies will fare if the world's largest economy flounders at the same time when China, the second-largest economy, is slowing and the European Union is struggling with an energy crisis.

Singapore stocks were down by a quarter of a per cent, which was relatively modest compared with the around half a per cent drop in Malaysian, South Korean and Japanese equity markets.

Yields on Singapore Government Securities bonds spiked, promising more pain in store for home buyers and corporate borrowers.

Since MAS fights inflation - the pace of change in prices - by managing the country's exchange rate against its major trading partners, interest rates in Singapore move in tandem with global moves in rates led by the Fed.

Mr Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, said higher-for-longer rates will likely be net positive for the Singapore banking sector, which is likely to see improved net interest margins.

However, growing prospects of a hard landing in the US and a stagflationary European Union may not bode well for Singapore's export-dependent economy, which may potentially affect loans growth over the longer term, he added.

The Bank of America expects three-month Singapore interbank offered rates moving higher into the 3.5 per cent to 4 per cent range over 2023 - the highest in almost two decades, last seen in 2006-2007.

The Singdollar tested levels above $1.42 versus the US dollar - its lowest level since April 2020. The drop sent currency analysts back to the drawing board to recalculate their year-end forecasts that were in the range of $1.38 to $1.40 only a week earlier.

Mr Jeff Ng, senior currency strategist at Japan's MUFG Bank, said that despite the US dollar strength, the Singdollar has gained against most other currencies in the quarter to date, including the Malaysian ringgit, Thai baht, Chinese renminbi, Japanese yen, the euro and British pound sterling.

"The reason is MAS policy that has specifically targeted a stronger Singdollar this year. At the same time, positive fundamentals - being ahead in economic reopening - high inflation and current account surpluses helped to boost Singdollar confidence compared with other currencies," he said.

While Mr Ng said MAS will still continue to tighten monetary policy in October, some analysts are not as certain.

MAS has tightened its policy stance four times since October 2021, pushing the Singdollar up against the currencies of virtually every trading partner except the US and making it one of the most aggressive tightening cycles.

Some analysts believe that with the US dollar rallying and interest rates set to rise more than expected, MAS may not need to be as aggressive as it has been so far.

Ms Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, said the chances of another tightening move by MAS were around 50 per cent.

"I think it is a difficult call for October," she said.

Ms Ling said key to watch would be August inflation data due on Friday. She expects headline inflation to rise to 7.3 per cent and core inflation at 4.9 per cent.

Consumer prices in Singapore are already running at their fastest pace since 2008.

There are risks to the global economy as well to consider.

Dr Baig said that with the US rate heading for 4 per cent and beyond and the US dollar on the surge, a massive repricing of asset valuation is on the cards worldwide.

"There is no near-term silver lining, I'm afraid," he said.

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A version of this article appeared in the print edition of The Straits Times on September 23, 2022, with the headline All eyes on MAS after hawkish Fed rate hike deals blow to Sing$. Subscribe