MAS preview: Maintenance of a flat SGD NEER policy band is widely expected - Westpac

Sean Callow, Research Analyst at Westpac, explains that the Monetary Authority of Singapore releases its semi-annual policy statement at 8am local/10am AEST Thursday, at the same time as the advance reading on Q1 GDP.

Key Quotes

“Maintenance of a flat SGD NEER policy band is widely expected, though there could be a more positive tone on the outlook. GDP looks set to have contracted modestly after the Q4 surge.”

“The MAS switched from very mild SGD NEER appreciation to 0% in April 2016 as it downgraded growth and inflation forecasts. It maintained the flat policy band in October 2016 and was quite gloomy on growth, saying the economy had weakened and that growth is “not expected to pick up significantly in 2017.”

“In February, Singapore's Ministry of Trade and Industry kept the 2017 growth forecast at 1-3%, which it describes as “modest”. The 2% midpoint would be very much in line with the 1.9% expansion in 2015 and 2.0% in 2016. The international outlook is seen as brighter, though the government warned of rising protectionism and a potential slowdown in China. Domestically, manufacturing is expected to be resilient but construction weaker. A similar warning on protectionism in particular seems likely in this week’s statement, while the 1-3% growth projection for 2017 seems wide enough to keep intact.”

“October’s view that core inflation “will rise only gradually next year. Over the medium term, core inflation is still expected to trend towards but average slightly below 2%” should be maintained. This measure sat below 0.5% y/y for much of 2015 but recovered to above 1% by mid-2016 and as far as 1.5% in Jan 2017. The slip back to 1.2% in Feb seems to fit the “rise only gradually” forecast.”

“Unchanged baseline growth and inflation forecasts surely mean another 6 months of zero slope for the SGD nominal effective exchange rate. On our estimates, SGD traded mostly in the lower half of the policy band from the October review to February 2017 but has since edged up to just above the midpoint – see chart. Volatility has been low, with only a handful of days of -1% or weaker. This suggests it has been a low stress 6 months in terms of FX stability.”

“USD/SGD should take the release calmly, with a steady hand widely expected. There may be a modest dip in the pair though if the MAS language on the global growth outlook is somewhat more upbeat, which seems warranted compared to October. As for Q1 GDP, it is important not to be distracted by the swings in growth exaggerated by annualized estimates. Consensus for 2.6% y/y in Q1 versus 2.9% y/y in Q4 makes a lot more sense than -1.8% versus +12.3%. The advance estimate is very prone to revision.”