MAS keeps Singdollar policy unchanged on low core inflation outlook

MAS said prospects for global growth have firmed and should provide support to the ongoing recovery in the Singapore economy.
MAS said prospects for global growth have firmed and should provide support to the ongoing recovery in the Singapore economy.PHOTO: ST FILE

SINGAPORE - Singapore's central bank kept monetary policy steady on Wednesday (April 14) as it expects core inflation to remain low this year, but analysts say there is a chance it might tighten the policy at its next review in October. 

As widely expected, the Monetary Authority of Singapore (MAS) left unchanged the Singapore dollar's rate of appreciation at 0 per cent per annum of its policy band, it announced in its latest twice-yearly monetary policy review.

The width of the policy band and the level at which it is centred will also be unchanged.

It made the decision even as Singapore's core inflation - which excludes accommodation and private road transport costs - turned positive in February for the first time in a year. An appreciation of the Singdollar against the currencies of Singapore's major trading partners will reduce imported inflation and dampen consumer prices.

MAS said prospects for global growth have firmed and should provide support to the ongoing recovery in the Singapore economy.

"Nevertheless, output will still be below potential in 2021. Although MAS core inflation is expected to rise gradually this year from its current low levels, it will remain short of its historical average," it added.

MAS also said Singapore's economic growth this year is likely to top the official 4 per cent to 6 per cent forecast range, barring a setback to the global economy. On Wednesday morning, flash data showed that the economy recorded a surprise 0.2 per cent year-on-year growth in the first quarter of this year, its first expansion since the onset of the Covid-19 pandemic.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye said there is a 30 per cent probability MAS will tighten policy to a “slight appreciation bias” at its October review given the risks of an inflation overshoot and stronger growth recovery. 

Ms Selena Ling, head of treasury research and strategy at OCBC Bank, however noted: “The policy statement was cautiously nuanced to tilt away from the previously dovish bias to one that is more upbeat and watchful, but probably falls short of outright hawkishness that would suggest a tightening at the October policy meeting is imminent.”

Core inflation, which excludes the costs of accommodation and private transport, was 0 per cent in January to February over the same period a year ago.

It rose from the minus 0.2 per cent in the fourth quarter of last year, mainly due to fading disinflationary effects of government subsidies on healthcare and education services introduced in the first half of 2020.

Overall inflation rose to 0.5 per cent from minus 0.1 per cent over the same period.

MAS expects inflation in Singapore to rise at a more gradual pace in the second half of this year despite "some upside risks to global price pressures".

"While higher global oil prices will continue to pass through to domestic prices, surplus oil production capacity should cap further large price increases. Lingering negative output gaps in a number of Singapore's key trading partners should also keep overall imported inflation contained," it said.

Prices of some goods and services are likely to rise as labour market conditions improve and private consumption recovers, said MAS.

"However, these would be gradual, in line with subdued wage growth as the slack in the labour market will take time to be fully absorbed," it noted, maintaining its forecast for core inflation at 0 per cent to 1 per cent this year.

MAS, however, raised its forecast range for overall inflation this year to 0.5 per cent to 1.5 per cent, up from the minus 0.5 per cent to 0.5 per cent previously.

OCBC’s Ms Ling said: “Given that the domestic unemployment rates have only recently started stabilising, it is too premature to assume that consumer confidence and private consumption will recover to pre-Covid levels just yet.” 

The bank expects the Singapore economy to grow by 6 per cent this year, overall inflation to be 1 per cent and core inflation to come in at 0.5 per cent. 

UOB economist Barnabas Gan and strategists Peter Chia and Victor Yong said several factors such as higher oil prices and general improvement in private consumption could push inflation higher. 

“However, the uncertainties surrounding Covid-19 and the negative impact it has on economic growth could cap price pressures. Covid-19 infections across Singapore’s key trading partners may continue to cap import price pressures and inject headwinds to overall external inflation,” they added. 

MAS' policy stance on Wednesday was in line with the views of 16 economists polled by Bloomberg. All of them said the central bank would likely refrain from changing any of the three currency band settings.

The central bank uses the Singapore dollar's nominal effective exchange rate (S$Neer) as its main policy tool rather than interest rates, because Singapore is a small and open economy with a heavy dependence on trade.

The S$Neer is the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies of the nation's major trading partners. The S$Neer is allowed to float within an unspecified band. Should it go out of this band, MAS steps in by buying or selling Singdollars.

The central bank changes its monetary policy by adjusting the slope, width and midpoint of this band based on assessed risks to the country's growth and inflation.

MAS took the unprecedented step last April of both lowering the midpoint of its currency band and reducing the slope to zero.

That meant it allowed for a weaker exchange rate to head off deflation and support Singapore's export-reliant economy as the nation braced for a deep recession.

The Singapore dollar firmed on Wednesday after MAS’ policy announcement. It rose as much as 0.3 per cent to 1.337 per US dollar, its highest in nearly six weeks. 

DBS analysts told Reuters: “Confirmation that the MAS has an improved outlook has raised the possibility that it could undo some of the easing - perhaps as soon as October - if economic conditions strengthen.”