Policy easing unlikely as Singapore weathers sluggish global economy

Despite calls from some economists for the Monetary Authority of Singapore (MAS) to ease monetary policy this October, the latest comments from the central bank appear to indicate that no sudden dovish behavior is on the cards. The MAS’s managing director, Ravi Menon, recently stated that unless there was a “marked deterioration in the global economy, or significant shift to the inflation outlook”, policy would remain unchanged.

The MAS manage monetary policy by allowing the Singapore dollar to rise or fall against a basket comprised of the currencies of its main trading partners. The fluctuations take place within an undisclosed trading band, which the bank surprised onlookers by setting at zero back in April of this year.

Singapore was dealt another blow to its economy when on top of overall sluggish global growth, Britain voted to leave the European Union on June 23rd. In the wake of the referendum, the IMF cut its world GDP forecasts for the next two years, and the MAS announced a “modest and uneven growth path” now seemed more likely for Singapore’s export-dependent economy. Singapore’s GDP growth was 2% in 2015, with current consensus forecasts suggesting a lower level of 1.7% this year.

According to preliminary data, Q2 GDP grew 0.8% over the previous quarter at a seasonally adjusted annualized rate, which was an acceleration from Q1’s 0.2% more modest expansion. However, both the construction and the manufacturing sectors recorded decelerations in Q2. Private residential property prices, which peaked in 2013, have declined over ten consecutive quarters by an average of 9%.

Nevertheless, in the past few weeks more analysts are starting to come around to the view of the MAS that if the fallout from Brexit continues to be contained as it has been so far, there may be no need, after all, for immediate easing.

This view is further supported by the MAS backtracking on inflation guidance issued in June that suggested consumer prices would continue to decline for the remainder of 2016. MAS Chairman Tharman Shamnugaratnam has confirmed that although inflation remained subdued, it “could turn positive towards the later part of this year.” If correct, this would signal a turning point for the consumer price index which is in the midst of a record slump. The CPI has declined every month since November 2014 - the result of lower oil costs and a weaker property market.

The likely average headline inflation for 2016-17 currently stands at around 1%. However, the MAS now expects the level to be closer to the historical average of 2% as budgetary and other disinflationary pressures are expected to ease.

In addition to its responsibilities for monetary policy, the MAS has a wide remit for regulatory oversight of the financial sector. In the wake of the recent 1MDB scandal, Singapore’s financial integrity has taken a bit of a knocking, and the MAS has described its disappointment with lapses in management at a number of financial institutions in Singapore. The Authority will be looking to review regulatory framework, institutional supervision and international cooperation, as well as likely pushing for harsher rule enforcement. How Singapore balances the current pressures in the financial sector will be of heightened importance as the economy battles some tough headwinds going into a particularly challenging second half of the year.

(By Sarah Thorp)

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