News analysis

MAS' cautious stance signals lingering risks

Some segments of the local economy are showing encouraging signs of resurgence after suffering tepid growth over the past few years, while inflation rates are also rising alongside higher oil prices.

But the Monetary Authority of Singapore's (MAS) decision to stand pat on its exchange rate policy reflected a cautious tone and signalled that the economy is not yet out of the woods.

This decision, announced yesterday in the central bank's latest monetary policy review, came as no surprise to economists, who had previously noted that the pick-up in economic activity has been limited to export-oriented sectors such as manufacturing.

MAS 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 MAS can adjust when it reviews monetary policy.

A stronger currency counters inflation by making imports cheaper in Singdollar terms, while a weaker Singdollar - which corresponds to easing monetary policy - helps to lift growth by making exports cheaper abroad.

The Singdollar policy band is currently on a path of zero appreciation against the currencies of key trading partners.

MAS said in its policy statement yesterday that this stance "is appropriate for an extended period", even though both economic growth and inflation have picked up.

Singapore logged its third straight month of positive inflation in February, owing in part to gradually recovering oil prices.

"In our view, the 'extended period' for monetary policy will extend to at least October (when MAS will conduct its next monetary policy review)," said OCBC economist Selena Ling.

"The green shoots (for growth) remain less than broad-based and inflationary pressures are mainly arising from higher oil prices and domestic policy-driven pricing pressures," she noted.

These policy-driven price increases include higher carpark charges and household rubbish collection fees, as well as hikes to water prices and service and conservancy charges.

In contrast, price increases resulting from stronger demand for goods and services across the economy would be a stronger sign of recovering consumer and business sentiment.

Citi economist Kit Wei Zheng warned that a "two-speed economy" is emerging. Trade- related sectors, including some segments of manufacturing, are doing well on the back of stronger global growth, but a subdued labour market and weak consumer sentiment are still weighing on domestically oriented sectors reliant on discretionary spending.

The labour market in 2016 went through its roughest patch in years - unemployment rose, and more people took longer to find work.

Last year's 3 per cent resident unemployment rate was the highest since 2010. MAS said conditions in the labour market have "slackened" since its last policy review in October.

"This suggests that export-led growth surprises are not expected to broaden out into the domestic economy via a stronger job market any time soon," Mr Kit said.

It remains to be seen whether the manufacturing- and trade-led recovery is sustainable, and whether it will eventually broaden and lift the rest of the economy.

But MAS is being careful not to strike an over-optimistic note, and has made it clear that risks remain.

A version of this article appeared in the print edition of The Straits Times on April 14, 2017, with the headline 'MAS' cautious stance signals lingering risks'. Print Edition | Subscribe