MAS keeps monetary policy unchanged, makes heads scratch

Central bank's confounding decision suggests inflation risk is top concern, not growth risk.

Here's more from Maybank Kim Eng:

Inflation risk upstaged growth risk. MAS decision shows inflation remains a key policy issue, especially in light of the latest round of property measure to curb asset price inflation and talks of introducing inflation-indexed bonds.

Indeed, MAS policy statement contained an additional line saying “This policy stance is assessed to be appropriate in containing inflationary pressures and keeping the economy on a path of restructuring towards sustainable growth”. It also suggests MAS sees the current slump in growth as temporary, reflecting manufacturing inventory correction – a view that is probably boosted by recent improvements in US economic data for Sep 2012 e.g. rebound in US ISM manufacturing index to above 50; better housing market and job market conditions.

The Ministry of Trade and Industry (MTI) added that while sectors like manufacturing and wholesale trade are being affected by the slowdown in advanced economies, there will be modest support to headline growth from sectors like transport engineering and construction for the remaining part of this year, while MAS expects the global IT industry to register a mild recovery next year.

Nonetheless, given the developments in Europe, no clear sign of slowdown in China bottoming and fiscal cliff risk in US that prompted downgrades in global and regional economic and trade outlook by international institutions like IMF, WTO, World Bank and Asian Development Bank, as well as slowing monthly inflation rate is, MAS decision is indeed a huge surprise.