MAS 'unlikely to change stance on Singapore dollar'

Economists do not expect further slowing of S$ appreciation in April

The central bank is unlikely to further slow the appreciation of the Singapore dollar at its scheduled policy meeting next month, even though growth remains tepid, some economists say.

They believe a weaker Singdollar could worsen Singapore's already high living and business costs while not doing much to help growth.

The Monetary Authority of Singapore (MAS) uses the exchange rate as its main tool to strike a balance between controlling inflation from overseas and laying the foundations for economic growth.

A stronger currency helps counter inflation by making imports cheaper in Singdollar terms, while a weaker Singdollar helps exporters whose goods become cheaper in foreign markets.

In a surprise move in January, MAS acted ahead of its scheduled April meeting to tweak its exchange rate policy and ease the rise of the Singapore dollar.

The almost unprecedented step was prompted by the oil price plunge, which dampened inflation and reduced the need for a strong Singdollar to combat rising prices.

MAS expects inflation to come in between negative 0.5 per cent and 0.5 per cent this year.

This is down from earlier estimates of 0.5 per cent to 1.5 per cent, and is the first time the central bank has forecast the possibility of negative inflation, or deflation, since 2009.

In January, it said it will maintain the Singdollar's modest appreciation against a basket of other currencies but seek to reduce the pace at which it strengthens.

It will likely stick with this stance at its April meeting, said Barclays economist Leong Wai Ho, adding that January's move to ease monetary policy had already taken into account the weaker inflation outlook.

"We do not expect any further easing in April, as we think such a move could worsen the already high living and business costs in Singapore," he said.

MAS' January monetary policy shift was based on a "sizeable" reduction in the official inflation forecast, and the outlook has remained unchanged since, said Citi economist Kit Wei Zheng.

Oil prices are still down, with a slight pick-up expected in the second half of the year. Many businesses are also still not fully passing on higher wage costs to consumers because of tepid economic growth, he added.

This means that for now, there are no signs pointing to further monetary policy easing in April.

Mr Leong said while economic growth is expected to remain lacklustre, "the Government is not in crisis mode" and does not have to resort to weakening the exchange rate to bolster growth.

The "dividend from lower oil prices" is expected to give the economy a lift in the second half, he added.

Mr Kit said recent statements from MAS also point to a more optimistic growth outlook.

Ministers speaking during the Budget and Committee of Supply debates last week had reiterated the official forecast for economic growth of 2 per cent to 4 per cent this year, he noted.

Credit Suisse economist Michael Wan has a different view. He expects the central bank to further ease its exchange rate policy in April by reducing the level of the band within which the Singdollar is allowed to fluctuate.

This will likely be driven by expectations of even lower inflation, coupled with the soft short-term outlook for growth, he said.

Mr Wan expects inflation to average negative 0.3 per cent this year, down from an earlier forecast of 0.1 per cent.

This reflects a number of factors - firstly, education subsidies and foreign domestic worker levy cuts announced in this year's Budget.

The Budget also deferred for a year the planned hikes on foreign worker levies that companies have to pay, which will put a cap on labour costs for businesses and help keep inflation low.

Lastly, rising vehicle deregistrations point to a further dip in Certificate of Entitlement premiums, Mr Wan added.

"These factors, coupled with the weak property market, should more than offset the recent increases in petrol duties, in our view."

chiaym@sph.com.sg