MAS not likely to slow appreciation of Singdollar: Economists

Analysts feel the slew of measures in recent Budget may cushion impact of downturn

A woman holds a stack of $50 Singapore dollars. PHOTO: THE NEW PAPER

The outlook for Singapore's economy is far from upbeat, but economists say the central bank is unlikely to slow the appreciation of the currency to help boost growth.

The Monetary Authority of Singapore (MAS) is expected to keep its exchange rate policy unchanged at its meeting on Thursday, as the economy - while lacklustre - is not yet headed for a sharp downturn.

The recent Budget, which contained a slew of measures to help tide businesses over the rough patch, is also expected to cushion the slowdown.

The MAS uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth.

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

Citi economist Kit Wei Zheng said the global economic outlook has worsened since the Singapore central bank's last policy meeting in October, and prospects in major economies like Europe, China and Japan remain uncertain.

The downbeat outlook will continue weighing on the economy here in the coming months - the export-dependent manufacturing sector is still in a slump, and there has been a worrying rise in business closures across the economy, Mr Kit noted.

The Singapore economy grew at a modest pace of 2 per cent last year, but many expect things to take a turn for the worse this year. The 2015 growth rate was already the weakest the country has experienced since the global financial crisis. Economists polled by the MAS in its latest quarterly survey expect growth to come in at a modest 1.9 per cent this year, down from an earlier forecast of 2.2 per cent.

But this is unlikely to prompt a shift in monetary policy as the slower growth likely still falls within the central bank's projections.

"There was a lot of worry about the performance of the global economy earlier in the year, but now it's a bit calmer," said CIMB economist Song Seng Wun.

"It remains to be seen if this is just temporary but, for now, we would argue that the numbers so far are still within MAS parameters," he added.

The Budget also contained a number of short-term measures aimed at helping businesses cope, and should help cushion the downturn, HSBC economist Joseph Incalcaterra noted.

Meanwhile, core inflation - another key factor in the central bank's policy decision - also appears to be holding up, further reducing the likelihood that the MAS will change its stance.

Overall inflation had been in negative territory for 16 straight months in February - the longest stretch in Singapore history - due to property cooling measures and the global oil price rout.

But core inflation - which excludes home rents and private road transport costs to better gauge everyday expenses - has remained positive, as prices of essentials like food are still rising.

Still, economists say the weak labour market may tip the scales in favour of policy easing.

Mr Kit pointed to the "virtual stagnation of local job creation" last year, and a recent spike in redundancies.

"Rising under-employment may be another sign of softening labour demand... More workers could be put on shorter work weeks or on temporary layoff, with companies using permanent redundancies only as a last resort," he added.

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A version of this article appeared in the print edition of The Straits Times on April 11, 2016, with the headline MAS not likely to slow appreciation of Singdollar: Economists. Subscribe