To ease or not to ease: What's next for the MAS?

Here are some of the pressures the central bank is grappling with.

The Monetary Authority of Singapore (MAS) will hold its final bi-annual monetary policy meeting this week. Amidst deteriorating economic growth forecasts, expectations for the central bank to ease its Singapore dollar policy remain in place. But a few also believe that the central bank will maintain a 'cautious and tight' monetary policy until a silver lining appears.

Here are some of the views:

DBS Group Research

The MAS has maintained a modest appreciation of the SGD NEER. According to the DBS SGD NEER model, the SGD NEER is easing towards the floor of its appreciating policy band amid heightened market volatility and depreciation in Asian currencies. If this continues, the MAS would have two choices: spend reserves defending the band or relax its policy.

With a technical recession and full-year inflation expected to be negative, currency appreciation becomes a difficult policy to maintain. Challenges are compounded by potential capital flight that could result from higher US interest rates and / or fears of further yuan devaluation.

We expect the MAS to re-center the SGD NEER policy band lower by half a band, which by our model would be equivalent to a one-off devaluation of 2%.

BMI Research

The MAS will take this relative strength into account, and despite overt weakness versus the US dollar, the fact that the balance of currencies in the SGD's basket have weakened even more aggressively will likely be the central bank's primary concern.

Coupled with the aforementioned deflationary trend and weak economic activity, an easing of the MAS's SGD policy at its October meeting is our core view. If the MAS does not opt for re-centring the currency lower, it could instead reduce the appreciatory slope of the SGD to neutral, or even widen the band on the currency allowing for more volatility.

With pressure on the currency firmly to the downside, this could allow the SGD to trade weaker over the coming quarters.

OCBC Treasury Research

Our bias is for no change at the upcoming MAS policy meeting as growth-inflation dynamics are generally undershooting trend but not at an uncomfortable level yet and policymakers may choose to save their ammunition for a rainy day given that the US FOMC has turned more cautious about normalizing monetary policy and China is still slowing at this juncture.