MAS seen to be more confident on Singapore's self-sustaining growth

But it's still a wait-and-see game amidst fiscal stimulus in the US.

The Monetary Authority of Singapore (MAS) is now likely more confident that growth momentum could be self-sustaining, according to Citi, but it may still have to wait until at least early 3Q17 for greater clarity on US fiscal stimulus before deciding if a shift in the baseline scenario is warranted.

MAS now likely sees higher odds that 2017 GDP growth will fall in the upper half of the (unchanged) 1-3% range, consistent with findings in its March 2017 Survey of Professional Forecasters.

Here's more from Citi:

Hence, it is likely MAS now sees a narrower negative output gap for 2017 than in October. However, with productivity (and hence potential) growth also picking up in the late stages of restructuring, the output gap may take a longer time to turn positive, which we see as a pre-requisite for a resumption of an appreciation stance.

The two-speed economy may persist near-term, with construction only buoyed by public spending whilst retail sales remain dragged by structural challenges and weak labour market.

2016 job market weakening was consistent with the historical 6-8 quarters lagged response to GDP weakness in 2014-15. Given this lagged period, the resident unemployment could continue rising near-term even if growth momentum is sustained, though any rise is not expect to be large.

Domestic sources of inflation pressure should be contained, with any upside risks to inflation forecasts mainly from external sources, with ample supply capping any oil price rises.

Administrative measures (e.g. higher water tariffs) are expected to raise CPI by only 0.1-0.2%pts, though related rises in inflation expectations, which have historically had significant impact on actual inflation, will likely be closely watched.

Barring a spike in expectations, we suspect MAS is comfortable with its October forecast that core inflation will remain below 2% in 2017, which justified the flat slope for an extended period.

Including mild fiscal expansion, MAS likely still sees the overall macro policy mix as sufficiently stimulative amidst a narrower negative output gap.

We do not sense significant concern about higher interest rates, as MAS likely sees aggressive Fed hiking unlikely, whilst interest rates have historically not been the dominant factor influencing growth, even if they recognise they have become somewhat more important in recent years.

With the current policy stance consistent with a flattening of the REER amidst secular stagnation, MAS could reconsider its policy stance if clearer signs of a virtuous global growth cycle emerge. On balance, we suspect that whilst MAS will stand pat in April, October guidance to steer the NEER into the lower half is less justified, with tightening risks to increase in October.