Trade tensions put heat on MAS tightening

Analysts weigh on whether trade tensions will significantly challenge policy changes or not.

According to JP Morgan Singapore, Singapore’s semiannual policy review likely will be scheduled in April. Some analysts think the trade tensions could dent growth and weigh on how the Monetary Authority of Singapore (MAS) will respond to it through policy tightening.

JP Morgan analyst Benjamin Shatil noted that the past week’s escalation in trade tensions represents a wildcard for policy. “A material disruption to the export cycle upswing could depress growth via Singapore’s important position in regional supply chains, thereby challenging our baseline output gap and inflation forecasts. Whether this potentially negative force directly impacts the April policy decision will depend on whether policymakers now view it as a base-case outcome rather than a tail risk scenario. At this juncture, our bias is still the latter.”

Shatil maintained a forecast of continued broadening of growth and gradual reduction in labour market slack, underpinning a moderate rise in core prices. “This dynamic should guide policy toward a modest tightening stance next month,” he said.

“With this in mind, we refresh our broad framework for thinking about the links between the structural drivers of inflation and monetary policy in Singapore. An expected moderate rise in core inflation alongside a continued closing in the output gap would be consistent with a modest rise in the SGD NEER over the next few quarters. This could be delivered by a small 50bp positive policy slope at the April meeting,” Shatil added.

Meanwhile, Bank of America Merrill Lynch (BofAML) ASEAN Economist Mohamed Faiz Nagutha noted that the gradual pace of tightening is even more appropriate given the rise in trade tensions. “Whilst a more serious trade war remains the most important downside risk to the global and domestic economy, we believe that MAS will nevertheless place a heavier weight on baseline expectations for inflation and growth. Baring a serious escalation in tensions in the coming weeks, some degree of preemptive monetary tightening from the MAS will be appropriate,” he said.

Thus, Nagutha is firm the MAS will exit its neutral policy stance in the April meeting by moving to a 0.5% per annum slope and tighten further to 1.0% p.a. in October.

Meanwhile, Nagutha had expected a subdued the inflationary environment in 1H2017 but inflation to eventually rise higher in the second half of the year and into 2018. “With today's data, it appears that the critical point of inflection could come sooner than we had anticipated. Notably... MAS dropped the reference to commercial rentals remaining subdued. As we noted in our preview of the upcoming MAS meeting, inflation is more pervasive than suggested by headline figures and business costs are rising,” he added.