MAS likely to keep policy on hold in October, manufacturing sector to weigh on growth in H2

The Singaporean central bank, Monetary Authority of Singapore (MAS), is expected to keep its policy on hold next month, according to HSBC Global Research. Data released recently have deteriorated, particularly in the labor market. However, the central bank possibly expected this when it adopted a flat slope in April. The conditions for a downward re-entering in October are likely to be fulfilled yet, barring a severe contraction in the economic growth in the third quarter, stated HSBC.

“We do not think a negative slope - as contemplated by some in the market - is a possible policy outcome due to the impact it would have on domestic interest rates”, added HSBC.

Following a subdued first half, with economic growth averaging 0.2 percent sequentially, data at the outset of third quarter imply that the manufacturing sector would be a drag on the growth in the second half of this year, only partly countered by services. But the GDP is expected to remain quite within the official forecast range for this year.

Meanwhile, labor market data softened materially in the second quarter, implying downside risks to the central bank’s view on inflation; however, core prices are expected to be sticky in the short term. Moreover, monetary policy is expected to provide some help in offsetting weak labor market conditions. An expansionary FY2017 budget is expected to include wage credits to both avert job losses and underpin margins.

On the currency front, the FX market appears to be pricing in a small risk of MAS easing policy. The SGD NEER might therefore rise after an unchanged stance. However, it might eventually trade in the lower half of the band into 2017, stated HSBC. The central bank seems to be guiding the SGD NEER lower recently; however, it has not pushed it lower than the mid-point yet. This implies an acknowledgment of the recent decline in data and contemplation of a downward re-centering next year added HSBC.