MAS keeps analysts on tenterhooks as policy meeting draws closer

Expectations are mounting for another easing.

All eyes are now on the Monetary Authority of Singapore’s (MAS) next move as the release of its semi-annual monetary policy statement draws closer, with more analysts expecting another devaluation of the Singapore dollar.

The central bank is grappling with greater pressure to ease monetary policy following the slew of negative economic data that had hit Singapore in recent weeks, particularly persistently weak manufacturing activity and negative inflation.

“We expect the MAS to ease at the October policy meeting, in response to the probable recession and absence of inflationary pressures. Inflation is coming in at the low end of expectations,” said Hak Bin Chua, ASEAN Economist at Bank of America Merrill Lynch.

Singapore’s consumer price index (CPI) fell to its lowest level in six years in August, fuelled by low private transport costs.

Meanwhile, MAS core inflation--which excludes accommodation and private transport--rose to a mere 0.2% year-on-year, well below the official forecast range of 0.5% to 1.5%.

“We expect the SGD nominal effective exchange rate policy (NEER) band to be recentred lower by half a band. This is equivalent to a one-off devaluation of 2%,” said DBS Chief Investment Officer Lim Say Boon in a report.

However, others argue that the MAS will keep its policy on hold as long as Singapore's long-term inflation outlook remains intact.

"The short-term inflation outlook ultimately matters little for the central bank. After all, it already expects disinflation to continue, but remains fixated on expectations of a rise in core CPI next year, suggesting it will maintain its current policy settings,” said Joseph Incalcaterra, Economist at HSBC.

The central bank's policy will hinge on whether or not Singapore will enter a state of technical recession, or two consecutive quarters of negative economic growth.

"We think the 3Q flash GDP estimate - to be released by MTI at the same time as the MAS decision - will confirm a technical recession for Singapore, prompting the policy response," Chua said.

"While our base case is for policy to remain on hold, we think the MAS remains data-dependent and will flatten the slope if a technical recession materializes," Incalcaterra noted.