Singapore Seen Poised for First Monetary Policy Tightening in Six Years

Singapore's central bank is expected to tighten monetary policy in April for the first time in six years. (Reuters Photo/Edgar Su)

By : Masayuki Kitano | on 7:00 PM April 07, 2018
Category : International, SE Asia

Singapore. Singapore's central bank is expected to tighten monetary policy in April for the first time in six years, with economic growth seen solid enough to shift away from a stance associated with periods of acute weakness.

Twelve of 19 analysts, or 63 percent of respondents in a Reuters survey, predicted the Monetary Authority of Singapore would tighten its exchange-rate based policy at its review, due on April 13 at 8 a.m. (0000 GMT).

The 12 analysts expect the MAS to slightly increase the appreciation rate of the Singapore dollar's policy band from zero percent - a "neutral" stance that the central bank has kept for the last two years.

The remaining seven analysts expect the MAS to keep policy unchanged.

The results include four additional responses compared to an earlier Reuters poll published on March 27, in which 60 percent of analysts expected a tightening.

The government's advance estimate of first-quarter gross domestic product, due at the same time, is expected to show that GDP expanded 1.0 percent from the previous three months on an annualized basis, according to the median forecast in a Reuters survey.

On a year-on-year basis, GDP likely grew 4.3 percent, which would be the fastest pace since a near four-year high of 5.5 percent in the third quarter of last year.

The solid growth momentum and signs of improvement in the labor market are seen as outweighing the risks from US-China trade tensions, and putting the MAS on track to tighten policy for the first time since April 2012.

"They don't want to be behind the curve, given that the recovery has come quite some way, despite the downside risks as we look forward," said Vishnu Varathan, head of economics and strategy for Mizuho Bank in Singapore.

Analysts in the tightening camp say inflation is likely to edge higher in the medium-term and that the economy has strengthened sufficiently for the MAS to shift from a neutral stance. In the past, the central bank has resorted to such settings when the global economy deteriorated, including an 18- month period from October 2008 during the global financial crisis.

"We expect MAS to normalize and shift to a policy of modest and gradual appreciation ... We think the neutral stance is no longer appropriate or necessary given the strong growth recovery and rising core inflation," analysts for Maybank Kim Eng said in a research note.

Core inflation for the whole of 2017 hit a three-year high of 1.5 percent and is running at a slightly higher pace so far in 2018.

The MAS manages monetary policy by changes to the exchange rate, rather than interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed policy band based on its nominal effective exchange rate (NEER).

It can adjust policy by changing the appreciation rate, mid-point, or width of the Singapore dollar's policy band.

At its last policy review in October, the MAS changed a reference to maintaining its neutral policy stance for an extended period, a shift that analysts said created room for the central bank to tighten policy in 2018.

The central bank has kept the appreciation rate of the Singapore dollar's policy band at zero percent since April 2016.

Reuters

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