MAS policy statement may favor "slightly more activist" stance

See what this will mean for Singapore.

In its new monetary policy preview, OCBC Bank said the scheduled statement for this Friday will have two possible outcomes: A no change, or a slightly more activist stance. Both possibilities are in the cards and hinge mainly on the weight the central bank attaches to such factors as inflation and external growth.

Here's the complete preview from OCBC:

The Monetary Policy Statement due this Friday may be a closer call than initially perceived. As noted earlier, our base case call of no change in the parameters of the SGD NEER is premised on a still unsteady external growth outlook and acute inflation risks remaining non-threatening in the coming months.

In fact, by keeping policy unchanged (2.5% p.a. gradient, +/-1.5% band), we think the NEER would still sufficiently signal a hawkish stance in the coming months without diverging drastically from behavior suggested by a whole host of macro variables.

If this status quo scenario comes to pass, expect USD-SGD volatility to be measured.

However, a competing outcome on Friday may be for a slightly more activist monetary
stance (but not necessarily a more hawkish stance).

For one, the SGD NEER may be given a de facto lift in the coming months if the constituent currencies continue to retreat against the broad dollar in the coming months. Note that this development has also affected the broad valuations of the regional currencies in recent months.

Secondly, with growth prospects unlikely to be unhinged barring extreme tail risks, NEER appreciation remains largely in the bag.

Thirdly, if inflation is indeed officially viewed as less of a threat in the coming months, a slope flattening (a la October 2011) cannot be ruled out.

Thus, we think there may be a possibility for some form of re-centering higher in the mid-point of the NEER band accompanied by a slope flattening. We note that such a change to the policy mix should not be construed as significantly hawkish, but rather an attempt to accommodate the NEER’s projected medium term trajectory.

At first brush, such an outcome may impart immediate downward pressure on USD-SGD, although if the re-centering higher is accompanied by a slope flattening, undue SGD strength is expected to be tempered.

As an aside, we also note that announcement effects on the USD-SGD as suggested by policy changes in the last few years ultimately fade beyond the short term only to be overtaken over by broader global influences and NEER considerations.