MAS leaving window open for policy change in April: Economists

After easing three times between January 2015 and April last year, the Monetary Authority of Singapore stuck to its neutral stance of zero appreciation in the currency. PHOTO: ST FILE

SINGAPORE - 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 analysts say the central bank's 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, according to Trade and Industry Ministry (MTI) advance estimates, which take into account data from the first two months of the quarter.

This was higher than the 2.9 per cent growth in the preceding three months and the fastest pace since 2014.

Alongside these numbers the MAS announced that it would maintain its monetary policy stance.

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.

However, there was a key difference in the central bank's latest announcement. The MAS referred to comments it made in October 2016 that the neutral policy stance would be appropriate for an "extended period", but did not explicitly repeat the phrase in its latest statement.

In addition, the central bank also outlined its growth and inflation outlook.

The economy has performed "slightly better than expected" since its last policy review in April, the MAS noted. For the rest of the year and into 2018, Singapore's economic growth is expected to remain firm but could moderate slightly as the global economic recovery enters a more mature phase. Growth should also become more even across sectors in the coming quarters.

Growth rates across a broad range of sectors should be stable or improve slightly in the coming year, said the MAS, adding that economic expansion this year and next will be driven by productivity gains.

Core inflation, another key factor that goes into monetary policy decisions, will also inch up next year. It is expected to come in at around 1.5 per cent this year and average 1 to 2 per cent next year.

"MAS sees growth as steady but likely to slow slightly from this year, and more importantly, headline and core inflation outlook (remain modest). MAS also noted that core inflation is expected to trend towards but average slightly below 2 per cent over the medium term. All these essentially reinforces that there is 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 G7 central banks increasingly jumping on the policy normalisation bandwagon."

UOB economist Francis Tan noted that Singapore's growth-inflation dynamics have improved which means MAS "may have to embark on monetary policy normalisation soon", likely at its next meeting in April.

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