Singapore's fiscal boost makes next central bank move tricky

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The Monetary Authority of Singapore (MAS) will need to decide whether to tighten policy in the face of steady economic growth and greater fiscal spending, or hold its stance because of growing global risks.

Wednesday 20, February 2019

(Bloomberg) --Singapore’s expansionary budget for the coming year makes the central bank’s April policy decision slightly more complicated.

 “The case for further monetary policy tightening is diminishing,” with weaker economic growth and trade data adding downside risks to the 2019 outlook, said Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch in Singapore.

The decision is still a live one though, he said, and the MAS could surprise the market with a hawkish bias given solid growth rates and core inflation at or above the historical average of 1.7 per cent.

The MAS tightened policy in both of its scheduled decisions last year, buoyed by underlying demand even as they cited US-China trade tensions as a major risk to the outlook. With talks to resolve the dispute still ongoing and a wave of dovishness overtaking central banks this year, Singapore’s policy makers may have reason to pause.

Unlike most developed nations, the MAS uses the currency rather than interest rates to conduct policy. It guides the Singapore dollar against a basket of its counterparts and adjusts the pace of the appreciation or depreciation by changing the slope, width and centre of a currency band. The MAS doesn’t disclose details of the basket, or the band or the pace of appreciation or depreciation.

Nomura Holdings said the MAS decision is going to be more of a close call, with the expansionary budget “marginally” increasing the probability of policy tightening, but risks are still tilted towards a pause given global uncertainty about trade and a slowdown in China.

While the MAS core inflation rate is picking up -- it rose to 1.9 per cent year-on-year in December from 1.7 per cent in the prior month -- growth in the trade-reliant economy is weakening. Officials forecast expansion will slow to the lower half of a 1.5-3.5 per cent range this year.

Any surprises in that data between now and the April decision could be the real determinant for the MAS.


TAGS : US-China trade tensions, Monetary Authority of Singapore

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