What's next after the MAS tightening?

Analysts are divided on whether the tightening will continue in October or not.

The Monetary Authority of Singapore (MAS) raised the S$NEER slope slightly from its previous neutral stance. The centre and width of the policy band were left unchanged. Analysts weighed on what's next for monetary policy given possible inflation surprises and ongoing global trade tensions.

Standard Chartered Singapore ASEAN chief economist Edward Lee noted that an important takeaway was the mention of the slope being increased slightly. "We estimate the slope is now +50bps per annum. We said previously that the MAS may act on facts, rather than wait on the unknowns in trade developments," he said.

For Maybank Kim Eng analyst Chua Hak Bin, the downside risks from ongoing trade tensions between US and China did not delay the central bank’s decision to normalize with the MAS stating that “the measured adjustment to the policy stance takes into account” the trade tensions. "The monetary policy statement also provided a more rosy outlook for Singapore’s growth which “should continue at a broadly steady pace in the quarters ahead”, driven by trade-related sectors and financial and business services," he noted.

Natixis senior economist Trinh Nguyen, however, focused more on the central bank's target on the price of its currency via a trade-weighted Singapore exchange rate, not on the price of money or interest rates. "Its decision to allow the S$NEER to gradually appreciate belies a motivation to temper the rise of its domestic rates, as the Singapore the Swap Offered Rate (SOR) is determined by both USD rates and expectations of the SGD. In other words, the sharp rise of the LIBOR may derail the nascent recovery of domestic demand, if not threatens the serviceability of Singapore’s high corporate leverage ratio, and require the MAS to anchor expectations of SGD to temper the rise of domestic rates," she noted.

Lee sees that there is more room for the central bank to increase the slope by 50bps further in October. "After the removal of its previous guidance of maintaining a neutral policy stance for an extended period, it is harder to determine forward guidance in the monetary policy statements," he said.

Chua disagreed and said another tightening is unlikely unless inflation surprises meaningfully on the upside. "The SGD is currently trading at about +0.8% above the mid-point of the band, by our estimates. Our FX research team is forecasting the SGD to strengthen to 1.24 against the US dollar by year-end," the analyst added.

Nguyen also said MAS is unlikely to let the SGD appreciate too excessively versus key partners such as the Eurozone, China, and Malaysia even if the index rises to ensure that the domestic recovery stays on track. "The MAS has been successful so far in having its cake and eating it too. Even if the trade-weighted currency appreciated slightly and will continue this trend, the MAS has been mindful to keep the currency competitive versus key trade partners such as China, the Euro zone and Malaysia. For example, the SGD has weakened versus the EUR, the CNY, and the MYR. On the interest rate side, the SOR has risen only gradually and there is a spread between Singapore and US rates," she noted.

OCBC treasury research analyst Emmanuel Ng concurred with Chua and said think the MAS will likely let the current policy ride towards October. "Specifically, we’d also continue to watch for an explicit drift higher (nominal Index values) in the S$NEER in the coming 6 months. Secondly, there are no implications for S$NEER-implied USD-SGD valuations... Generalized market expectations would likely settle upon a +0.50% p.a. slope for the S$NEER band at this juncture, pending market triangulation in the coming weeks/months," he said.

Lee noted that inflation increase is also in the MAS' expectations pending the maturity of the global cyclical upturn. "In this situation, the MAS may want a greater monetary policy buffer ahead of the next downturn, which means the monetary policy normalisation cycle may be short. Fourth, there was a nuanced mention that the latest measured policy adjustment takes into account ongoing trade tensions, which may allude to the probability of further moves once the trade situation clears," he concluded.