|MAS to ease policy in October as risk of technical recession lingers: Economists|
The Monetary Authority of Singapore (MAS) would likely reduce the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, which means slowing down the local currency’s pace of appreciation against an undisclosed basket of currencies.
The width and the level at which the band is centred are set to be left unchanged, market watchers said.
Instead of setting interest rates, the MAS operates a managed float regime for the Sing dollar, allowing the exchange rate to fluctuate within an unspecified policy band. It changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the local currency.
Last April, the central bank moved out of the neutral stance it had held since April 2016, with its first tightening move in six years to allow for “a modest and gradual” appreciation. It followed up with a second tightening at its October meeting. But amid the headwinds of trade tensions and moderating global growth, the MAS opted to stand pat six months ago.
Maybank economist Lee Ju Ye expects the MAS to reduce the slope “slightly” this month. “We currently think the slope is at a 1 per cent appreciation stance and they will bring it down to 0.5 per cent.” This view is in line with economists from at least four other financial and research houses, though some flagged the possibility of more aggressive easing.
Barclays economist Brian Tan, who also expects a 50-basis-point slope reduction, said: “We view the risks to our call as tilted towards a more aggressive 100-basis-point slope reduction to zero per cent in October, rather than no easing at all, especially with industrial production plummeting.” The central bank, however, will stop short at a downward re-centering of the band, added Mr Tan. Mr Rajiv Biswas, chief economist for Asia Pacific at IHS Markit, noted that the MAS will be keeping a close eye on downside risks, such as the protracted trade war between the United States and China. “A key concern for the MAS will be the sharp contraction in Singapore’s manufacturing output and exports in August,” he told CNA.
August data showed industrial production slumped 8 per cent year-on-year, way steeper than expected and “dashing hopes of a recovery” in the manufacturing sector, said Maybank economists.
Non-oil domestic exports fell for the sixth straight month in August, although by a smaller magnitude of 8.9 per cent and breaking a five-month streak of double-digit declines.
The monthly purchasing managers’ index (PMI) fell to its weakest in more than three years in September, offering an early indicator of the month's trade and factory production numbers. At 49.5, this also marked the index’s fifth month in negative territory. A reading below 50 indicates that the manufacturing economy is contracting and vice versa when the index rises below 50. These dismal economic numbers continue to fan market fears of a technical recession – defined as two straight quarters of quarter-on-quarter contraction – in the third quarter.
UOB economist Barnabas Gan said “a sustained contraction in Singapore’s manufacturing momentum into September is likely, where we think a negative growth of around 4.5 per cent year-on-year or more should trigger a technical recession scenario”. “Another set of weak PMI data suggests that the Singapore economy may not be out of the woods yet,” said OCBC’s head of treasury research and strategy Selena Ling.
“The manufacturing weakness is already very evident but we’re starting to see the second round effects on consumer sentiments and other services sectors. This may translate to some softness in the labour market ahead and is something that policymakers are probably watchful for," she added.
To be sure, there are other sectors that may offer some support.
Growth in the construction sector will likely strengthen in the third quarter, while that of services is set to stay resilient due to the financial, tourism and business services segments, said Maybank economists.
On tourism,Singapore has seen a rise in both business and leisure visitors due to the ongoing unrest in Hong Kong, said Ms Lee, citing figures from the Singapore Tourism Board that showed a 46.3 per cent jump in Chinese tourist arrivals for July.
“There’s anecdotal evidence that bookings for August and September remain quite high,” she told CNA.
“This is a temporary factor but we see Singapore and the region benefiting from Chinese tourists that are avoiding Hong Kong, especially during the upcoming Golden Week holiday.” Meanwhile, inflation is expected to remain soft moving forward, economists said.
Core inflation, which strips out accommodation and private road transport costs, stayed at a three-year low in August. Headline or overall inflation edged up to 0.5 per cent from 0.4 per cent in July. The latest data “corroborated the trend of tepid inflation” in Singapore, said Ms Liu, adding that this deterioration in inflationary pressures paves the way for MAS to ease policy this month. Recent volatility in crude oil prices, induced by the unexpected drone strikes on Saudi Arabia’s oil facilities, are unlikely to cause much inflationary risk, economists noted.
“Has it changed the central bank’s headline and core inflation forecasts? Not at this point,” said CIMB Private Banking economist Song Seng Wun. Even with the recent ups and downs, global oil prices remain lower than they were a year ago. Unless there is a sustained rise in the price of oil, the impact on Singapore’s inflation will likely be minimal, added Mr Song. With MAS easing on the cards and the US Federal Reserve likely to do another rate cut by the year-end, the Sing dollar is expected to move “slightly lower” against the greenback to around 1.39 by then, Mr Biswas said.
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