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As central banks turn dovish, economists weigh MAS’ options

SINGAPORE — As the initial shock surrounding Britain’s vote to leave the European Union (EU) wanes and financial markets find their footing, attention has turned to the central banks and how they will steer their respective economies through the potentially tougher times ahead.

Demonstrators protesting against Brexit in London earlier this month. As the initial shock surrounding 

Britain’s exit wears off, attention has turned to the central banks. While their actions may differ, the 

mood among central banks — which held meetings after the vote — is not aggressive. Photo: The New York Times

Demonstrators protesting against Brexit in London earlier this month. As the initial shock surrounding

Britain’s exit wears off, attention has turned to the central banks. While their actions may differ, the

mood among central banks — which held meetings after the vote — is not aggressive. Photo: The New York Times

SINGAPORE — As the initial shock surrounding Britain’s vote to leave the European Union (EU) wanes and financial markets find their footing, attention has turned to the central banks and how they will steer their respective economies through the potentially tougher times ahead.

So far, many have kept policy interest rates unchanged, including the Bank of England and European Central Bank. Closer to home, Malaysia’s Bank Negara opted to cut its key rate in a surprise move. While their actions may differ, the mood among central banks — which had held meetings after the Brexit vote — has certainly been dovish, acknowledging the room for monetary easing.

In Singapore, questions have also surfaced over whether the Monetary Authority of Singapore (MAS) will — for the second time this year — ease policy at its scheduled review in October.

Economists agree the Republic has a more challenging climate to navigate in the second half of the year, with the impact of Brexit adding to concerns over a slowing China and an uncertain recovery in the United States. However, they are split on whether the conditions warrant an easing by the central bank.

Credit Suisse economist Michael Wan, who is in the “easing” camp, said the uncertainties in Europe add urgency for the MAS to make a move.

“Our call was for easing anyway, but Brexit tilts the balance for the timing earlier towards October from our earlier call of next April … It is our expectation that both growth and inflation will moderate in the third quarter,” he said, adding that the most likely move is a downward re-centring of the Singapore dollar nominal effective exchange rate (S$NEER) band.

ABN Amro’s senior FX strategist, Roy Teo, shared similar views. He noted that the recent strength in the local dollar against currencies such as the yuan and euro presents more headwinds to Singapore’s export and inflation outlook.

The Republic’s non-oil domestic exports marked a return to contraction territory last month with a 2.3 per cent year-on-year fall, reversing the stellar 11.6 per cent growth seen in May, showed data from trade agency International Enterprise Singapore. Gross domestic product grew 2.2 per cent year-on-year in the second quarter, marginally higher than the 2.1 per cent growth in the first quarter, showed data from the Ministry of Trade and Industry.

“We expect economic growth and core inflationary pressures in Singapore to slow in the second half of this year. Hence, there is a case for the MAS to lower the centre of the policy band later this year in October as the average level of the S$NEER since April has been more than 1 per cent stronger than compared to the six months prior to April,” said Mr Teo.

The S$NEER, which tracks the Singapore dollar against an undisclosed basket of currencies from the Republic’s major trading partners and competitors, is the MAS’ main policy tool. The central bank intervenes by keeping the exchange rate within an unspecified band and changes the slope, width and level at which it is centred when it wants to adjust the pace of appreciation or depreciation of the local currency.

The MAS, which has two scheduled policy announcements a year in April and October, has eased policy three times since 2015. In January and October last year, it reduced the slope of the S$NEER band to allow the local dollar to appreciate at a slower pace. In April this year, it guided the local dollar to a zero appreciation stance.

UOB economist Francis Tan said the current policy stance is appropriate in managing the “still-weak global growth conditions” as core inflation — a key indicator that the MAS watches — has been on an upward trend in recent months, which gives the central bank little reason to lower the mid-point of the S$NEER band.

“Core inflation could moderate given the recent strength in the Singapore dollar, but the effect would be quite laggard and looking across the whole year it would still be elevated compared to last year when we had many months of close-to-zero core inflation,” he said.

The core inflation measure, which excludes the costs of accommodation and private road transport, rose to a 14-month high of 1 per cent in May. June’s consumer price index (CPI) data is due for release today.

Mr Tan’s view is consistent with that of economists at BNP Paribas, who said in a research note: “The limited impact since the Brexit vote on global commodity prices and our house view for (MAS’) outlook ensures that official core CPI … remains on course to accelerate to an average of 2 per cent year-on-year in 2017.”

He said: “This keeps it in line with the long-run average and thus undermines arguments for a re-centring of the S$NEER policy band. Consequently, in the absence of a deeper adverse shock to either global or regional growth projections, we expect the MAS to retain their current policy settings in October.”

Furthermore, the MAS is frequently seen as being ahead of the curve. Its move in April, for instance, was not accompanied by adjustments to parameters such as growth forecast or inflation like in previous policy adjustments. That was seen by many economists as a pre-emptive measure that external risks might dampen prospects for Singapore’s trade-dependent economy.

“The authority has been ahead of the curve by taking a pre-emptive monetary action in the previous meeting in April. Existing monetary policy stance remains appropriate in balancing the risks between growth and inflation,” said DBS economists in a research note.

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