Singapore central bank stands pat, warns of global growth, policy risks
SINGAPORE: Singapore’s central bank held policy steady as expected on Thursday, saying a “neutral” stance will be needed for an extended period as it looked to support an economy that contracted in the first quarter amid lingering risks to the global outlook.
Analysts said the Monetary Authority of Singapore’s (MAS) reiteration of the forward guidance from its last review and warning of “significant policy uncertainty” signaled a reluctance to tighten anytime soon even as the U.S. Federal Reserve remains on track to raise rates further this year.
“They remain in the large group of central banks including RBA, RBNZ, BOJ and BoC which see no need to prepare markets for tighter policy this year,” said Sean Callow, senior currency analyst at Westpac, referring to Australia, New Zealand, Japan and Canada.
“The Fed remains lonely on its tightening path.”
The Singapore dollar slipped briefly against its U.S. counterpart after the MAS said it will maintain its rate of appreciation of the local currency at zero percent, with the width of the policy band and the level at which it is centred unchanged.
“A neutral policy stance is appropriate for an extended period and should ensure medium-term price stability,” the MAS said in its semiannual monetary policy statement.
The trade-reliant economy contracted 1.9 percent in the first quarter from the previous three months on an annualised basis, data from the Ministry of Trade and Industry showed, matching the median forecast in a Reuters survey.
The slump was seen as payback for the outsized 12.3 percent jump in the fourth quarter, with many analysts seeing growth tracking in line with government’s 1-3 percent forecast for 2017.
The central bank acknowledged “slightly” improved prospects for the world economy but said “downside risks remain, alongside significant policy uncertainty,” underscoring worries among global policymakers about the outlook in the face of U.S. President Donald Trump’s protectionist threats, Brexit and geopolitical risks in the Middle East and North Korea.
“They are not turning more bearish on the economy but they are very mindful of the downside risks and quite rightly so,” said Vishnu Varathan, senior economist for Mizuho Bank.
Backing a majority view that MAS can afford to delay tightening for some time, Varathan said he expected no change in October. Whether the MAS removes the forward guidance will hinge on global economic conditions, he said.
As the global economy perked up from late last year, Singapore’s exports and manufacturing have bounced from depressed levels, helping lift inflation in line with official forecasts.
The improving prospects saw 18 of 19 analysts in a Reuters survey predicting the MAS would keep monetary policy unchanged on Thursday – one analyst expected an easing – after having eased policy three times since January 2015, most recently in April 2016.
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 because trade flows dwarf the city state’s economy.
The central bank maintained its projection for core inflation to average 1-2 percent in 2017, compared to 0.9 percent in 2016, and said underlying economic momentum remains intact.
The MAS also noted stabilising growth in China, the city state’s biggest trading partner, but sounded a cautious note on the outlook for consumer spending and said activity in manufacturing sector is expected to “remain patchy.”
“Unless we see a very sustained and strong pick-up that starts to cascade down more evenly there’s no reason for them to be worrying about falling behind the curve,” Mizuho’s Varathan said. – Reuters