Chart of the Day: Analysts predict MAS will continue to ease policy based on previous behaviour

MAS will give the government enough policy room.

Based on official expectations of the output gap and inflation, a simple framework modeling MAS’ behaviour was derived by analysts at UBS.

According to them, the discrepancy between the modelled policy outcome in recent years and actual policy is a deliberate effort on the part of the MAS to give the government (tight labour market) policy room to drive structural reform in the economy.

If that position still holds or if growth disappoints as UBS expects, the model suggests easier MAS policy.

The government's judgement that the output gap will close in 2015 comes despite continued discussion and concern surrounding the tight labour market – although in the budget the government did guide that it would slow the pace of labour market policy tightening.

The government maintained the recent forecasts of -0.5% to 0.5% headline CPI inflation and 0.5% to 1.0% core inflation in 2015.

Applying these latest official forecasts to UBS’ model implies results consistent with the 28 January policy easing.

It is also consistent with further policy easing if one believes either that real GDP growth will disappoint official projections of around 3% or that the MAS will continue to accommodate the government's ongoing tight labour policy.

UBS believes that growth will disappoint and the MAS will continue to accommodate, and analysts look for the MAS to ease policy by adopting a flat slope for the effective exchange rate policy band in October.