Analysts do not see the Monetary Authority of Singapore (MAS) reversing its policy stance in the next scheduled monetary policy statement in October, after the central bank announced, on April 14, that it would keep monetary policy unchanged — the first pause after five consecutive rounds of policy tightening since October 2021.

At the release of its latest Monetary Policy Statement (MPS), the MAS said that it would maintain the prevailing rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, with no change to the width of the band and the level at which its policy mid-point is centred.

This surprise move came in line with the central bank’s downbeat assessment for growth, projecting that Singapore’s gross domestic product (GDP) growth is projected to “moderate significantly” this year, in line with the global goods and investment cycle downturn.

MAS projects Singapore’s GDP to ease below trend growth to 0.5% to 2.5% this year from 3.6% in 2022 and for the output gap to turn slightly negative in 2023 with risks to global and Singapore’s growth tilted to the downside.

According to Alvin Liew and Peter Chia of UOB, while the MAS kept its inflation forecasts first made in the October 2022 monetary policy statement unchanged in last week’s announcement, two “notable differences” this time were that the central bank explicitly stated “MAS core inflation is projected to reach around 2.5% y-o-y by the end of 2023” and that it sees both upside and downside risks to inflation.

Similarly, OCBC’s chief economist Selena Ling says that despite no change to the MAS full-year 2023 growth forecast, there was a “recognition” of enhanced downside risks to the global and Singapore economy in the latest announcement.

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Ling also points out that while the MAS maintained its 2023 headline and core consumer price inflation (CPI) forecasts at 5.5% to 6.5% and 3.5% to 4.5% respectively, the language used “differs substantially” from its policy statement in October last year. “The language used is fairly cautious – growth prospects have dimmed, the trade cluster will contract further, the modern services sector activity remains subdued, and even the domestic-oriented sectors will moderate amid higher consumer prices and interest rates. Consequently, Singapore’s below-trend growth will push the positive output at end-2022 to turn slightly negative this year.”

She also notes that the Ministry of Trade and Industry (MTI) referred to the impact of tighter monetary policy in the advanced economies could be amplified by fragilities in the financial system, further restraining credit growth and dampening confidence. “This is likely a nod to the recent bank developments in the US and Europe which had contributed to some market concerns that credit conditions will tighten and partially mitigate the need for future monetary policy tightening,” Ling explains.

According to UOB’s Liew and Chia, overall, the MAS took the “prudent approach” to keep its policy unchanged in April, and now expect the current tightening cycle to have ended and for MAS to maintain this pause in the next October meeting.

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“If there is another off-cycle announcement before October, we think it will likely be due to a sudden worsening in external conditions leading to a sharp downgrade in growth outlook, so MAS will likely shift to a more accommodative policy rather than further tightening in its next move, but that is not our base case to expect an off-cycle policy announcement for now,” they add.

For DBS Group Research’s Irvin Seah, Chua Han Teng and Phillip Wee, the pivot in MAS policy did not come as a surprise to them. Since the last tightening in October last year, they note that the S$NEER has shifted from the top of the policy band to its mid-point, a sign that worries over elevated inflation were “giving way” to a challenging global growth landscape.

“The policy statement confirmed our belief that the sharp tightening between the two Octobers in 2021 and 2022 (steepening the slope from 0% to 3% and recentering the band up by 4%) were ample to dampen inflation pressures this year,” they explain.

The DBS economists also do not see MAS tweaking its exchange-rate based monetary policy in October, noting that the central bank expects core inflation to drop more discernibly in 2H2023 to 2.5% y-o-y by the end of 2023 from the record 5.5% in January to February.

“Externally, the MAS expects a sharper-than-expected downturn in the advanced economies to ease global inflationary pressures. Domestically, imported inflation has turned negative, and domestic wage growth will moderate with labour demand, especially in sectors exposed to international trade and finance. Overall, the MAS sees a negative output gap this year,” they add.

Due to the deeper-than-expected contraction for the Singapore economy in 1Q2023, the DBS team says it is “cautious” about the Singdollar’s outlook. “We share the MAS’s concerns on the drag on global investment and manufacturing from tighter financial conditions to intensify in the quarters ahead. The central bank is wary that more downside surprises in the financial system could amplify the impact of the past hikes by restraining credit growth and dampening confidence,” they say.

Given Singapore’s below-trend growth outlook, they expect the S$NEER to hold between 0% to 1% above the mid-point, only falling into the lower half of the band in the event of a global recession.

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The UOB economists add that the end of the MAS tightening cycle could mean that Singdollar outperformance “gradually fades” after rallying strongly in the tightening cycle, from about 126.6 in October 2021 to about 136.0 in early April.

According to them, the strong outperformance of the SGD has seen it appreciate against almost all of its trading peers, except for the Swiss franc (CHF) since October 2021, with gains ranging from 1.7% compared to the US dollar (USD) to as much as 15.4% compared to the Japanese yen (JPY). “Now that we expect the MAS tightening cycle has effectively ended after today’s decision, the current pace of S$NEER appreciation will likely abate,” they say.

MAS’s pause also came as no surprise to the US banks, JP Morgan and Morgan Stanley, who both expect no further tightening moves from the MAS for the rest of this year.

“After this pause, we think that the bar to restart the tightening cycle is now higher. With growth expected to remain relatively soft and inflation expected to moderate more as we move further in the year, our base case is that the MAS will continue to stay on hold at the October 2023 monetary policy meeting,” write Morgan Stanley analysts Derrick Kam and Jin Choi.

They add that while they view the steepening of the S$NEER policy band as a more “plausible risk scenario”, they highlight that their estimate of the slope of the policy band suggests that it had only been steeper during the mid-2000s and the early 2010s – periods when growth was relatively strong and trade partners were in a better stage of the cycle as compared to currently.

“In this context, we believe that the global growth outlook would have to improve materially before this scenario comes under the MAS's consideration. This better global growth backdrop should also lead to fresh upward impetus to the inflation path, whether it is in the form of a significant upward movement in global commodity prices,” they continue.

On what would prompt the MAS to consider easing, Morgan Stanley’s Yam and Choi say that it might happen if the global economy faces downward pressures, especially if the US economy were to enter into a deep recession.

“In this scenario, we would view a flattening of the S$NEER slope to 0% as a first option, while a flattening of the slope and a downward recentring would enter as another plausible risk scenario depending on the magnitude of the downturn,” they say.

In their report, JP Morgan’s Ong Sin Beng and Abbas Keshvani are also expecting Singapore’s core inflation to slow “discernibly” in the 2H2023, in line with MAS’s guidance. On the softer-than-expected GDP figures for the 1Q2023, the analysts are keeping their growth forecast unchanged for the full year for now, although that may be subject to revision with the release of the final 1Q2023 GDP report in May. “The 1Q2023 flash estimate affirms our macro view of an ongoing rotation in activity, with easing goods output offset by the services sector. However, the softening in other service sectors, including wholesale/retail trade and financial services presents a headwind,” they write. They add that they are remaining long on the S$NEER as they deem it unlikely that the NEER should move lower in the near-term. “In previous MAS meetings which marked the end of a tightening cycle, S$NEER has historically not trended lower in the short term after the meeting date. This implies that even if the market starts to eventually price in easing, it is unlikely that the S$NEER should move lower in the near term,” they say.

“Moreover, forwards are already pricing in the S$NEER moving back to the midpoint of the band in six to nine months from now, from the current 1.2% above the mid-point.” On MAS’s pause, Citi Research’s Kit Wei Zheng notes that the brokerage’s base case was for a steepening of 50 basis points (bps), though they noted a 40% chance of a pause should the global financial conditions tighten.

“Sell-side expectations were split, with 12 out of 22 analysts surveyed by Bloomberg expecting tightening (eight seeing a steeper slope), and the rest expecting a pause,” he writes. “S$NEER traded 120 bps to 130 bps above the mid-point prior to the MPS, but fell to [around] 90 bps after. We see the slope at 1.5% per annum (p.a.) and a width of +/-2% from the mid.”

The analyst sees the MAS also pausing its policy in October for the time being. Any easing will mean that the core will have to fall “significantly” below the implicit 1.7% target, notes Kit. “With core seen to have peaked and the MPS stressing that the effects of monetary policy tightening since October 2021 should dampen inflation further, we sense a higher hurdle for further tightening from hereon. In particular, we look to the upcoming Macroeconomic Review for clues on the MAS’s specific point forecast and quarterly trajectory,” he writes.

“Judging from the extended pause in 2012 - 2014, any modest downside inflation surprises will likely be welcome by MAS insofar as they are seen to lower inflation expectations, but will themselves be insufficient to trigger easing in October,” he adds. The Citi analyst has also cut his GDP forecast to 1.4% for 2023, down from 1.8% previously, after Singapore’s GDP for the 1Q2023 stood lower than expectations at 0.1% y-o-y and -0.7% m-o-m.

“The outlook remains uncertain with risks to the downside,” he writes, although he does not assume that Singapore will enter into a technical recession for now despite his lowered estimate. Standard Chartered analysts Edward Lee, Divya Devesh and Jonathan Koh notes that MAS’s policy statement bias suggests a “neutral stance” that’s veering towards the dovish side. This signals that the central bank is comfortable leaving its policy parameters unchanged for a while, they say.

The analysts’ comments come after they expected the central bank to keep its policy unchanged.

“On balance, we are aligned with the central bank on the core inflation trajectory. Unless core inflation turns out to be stickier than thought, we maintain our call for the MAS to keep policy unchanged for now,” they write.

In addition, they expect the S$NEER to remain “range-bound” within 80 bps to 160 bps above the mid-point of the policy band.

“Given the MAS’ concerns on growth and the dovish tilt of the policy statement, market participants are unlikely to price in further MAS tightening. At the same time, the carry on long S$NEER is still attractive, at least in the short term,” they say.

On Singapore’s GDP estimate for the first quarter, the analysts note that the contraction came larger than they had expected it to be.

“The growth outlook is also dim, with the MAS flagging the drag on global investment from tighter financial conditions, which is likely to intensify in the quarters ahead, and for the reopening boost to demand to fade through 2023,” they say.

As such, the analysts have lowered their GDP growth estimate to 1.3% in 2023, within the government’s official range of 0.5% to 2.5%.

“Softer external demand and the peaking of the electronics cycle are likely to continue to weigh on trade-related sectors. The latest international banking sector turmoil may also affect ‘animal spirits’ and weigh on the financial sector. That said, a continued tourism recovery and robust labour-market conditions should support growth even as domestic spending moderates,” they add.

HSBC Global Research’s Yun Liu and Jun Takazawa say they do not believe that monetary loosening is “imminent” in the near-term after MAS’s pause at its April MPS.

“While today’s decision was a pause, it was rather a ‘dovish pause’, reflecting the MAS’ increasing concerns on growth. Indeed, the policy priority has clearly shifted from high inflation to slowing growth,” they write.

On growth, the economists note the MAS’s “pessimistic tone” about Singapore’s economic growth prospects in 2023. The way they see it, the “extremely sluggish performance” in the manufacturing and trade sectors is likely to be the main reason behind the pessimism. The drag in the manufacturing and trade sectors began with the slumping demand for semiconductors and expanded to other sectors.

“All in all, [April 14] marks the end of the MAS’s current tightening cycle. We believe the MAS will maintain its monetary policy unchanged from now, but the key question is, when will it start to loosen? Despite uncertainty on the global economy, our central case is for the MAS to hold until end-2024. Singapore will likely see slower growth this year, but it is not a recession. From now on, the focus point will be high frequency indicators to gauge where growth is going,” they write.

In foreign exchange (forex), they see that the SGD will cease to become an outperformer but instead becoming a “beta” play to the broad USD or a funding currency. A funding currency refers to money borrowed in one currency to purchase another.

The pivot in MAS’s policy came as no surprise to most analysts

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