MAS says present monetary policy stance suitable for macroeconomic conditions in 2016

On Monday, Singapore’s central bank Managing Director Ravi Menon stated in the MAS Annual Report 2015/16 that the present monetary policy stance continues to be suitable for the overall macroeconomic conditions in 2016. He also said the central bank is keeping a close watch on three factors – Brexit's implications, slowdown in China’s economy and the shape of US economy's recovery.

He said the nation’s economic growth continues to be weak and that it would remain weak even in the second half of 2016. The report mentioned that core inflation is likely to accelerate gradually in the course of 2016 and would average around 1 percent. According to the MAS report, headline inflation might enter the positive territory towards the later part of this year, barring huge shocks to global oil prices or a surprising drop in COE premiums.

The Singaporean central bank is prepared to curtail extreme volatility in the trade-weighted SGD. It is not the time to alleviate the property cooling measures yet as there is still some way to go to steady the property market and return household debt sustainability, noted Scotiabank in its research report.

In June, the headline inflation in Singapore accelerated to -0.7 percent year-on-year in June. In the previous month, the MAS had eased limits on car finance that stimulated COE premiums in the recent auctions. This would enhance the contribution of private road transport to headline inflation. MAS core inflation quickened slightly to 1.1 percent year-on-year owing to higher services inflation from 1 percent in May, similar to market estimate, said Scotiabank.

In a statement in June, MAS said the core inflation is expected to be in the lower half of the 0.5 percent to 1.5 percent projection range for the entire 2016. However, in a statement published on Monday, the MAS said it expects core inflation to average about 1 percent for the whole of 2016. By October 14, the MAS is set to release its semi-annual Monetary Policy Statement.

“We expect the monetary authority to maintain its current policy of a zero percent appreciation of the S$NEER policy band. There should be no change to the width of the policy band and the level at which it is centred, in our view”, added Scotiabank.

The Singaporean central bank, in the past monetary policy statements seldom adjusted the band’s width, while re-centring the band only when the current S$NEER level was not close to the band’s mid-point.

“According to our estimate, the S$NEER is running slightly above the centerline now. In the meantime, we note some tail risks that S$NEER could trade well below the centerline of the S$NEER policy band when approaching October semi-annual MPC meeting and the city-state’s inflation may decelerate markedly in the coming months”, noted Scotiabank.

This situation might urge the central bank to re-centre the band to the current level of the SGD NEER at that time.