MAS expected to retain current policy stance following 2Q GDP results

Citi Research and BNP Paribas have indicated that they do not expect the Monetary Authority of Singapore (MAS) to re-center the SGD nominal effective exchange rate policy band.

This comes as the 2Q16 GDP results released by the Ministry of Trade and Industry indicated that the economy grew 2.2% on a y-o-y basis in the quarter, or 0.8% at a seasonally adjusted annual rate.

“The data does not provide a conclusive case for downward re-centring in Oct,” says Citi analyst Wei Zheng Kit, lead author for the Citi report dated Wednesday. He places the odds of a re-centring at only 30%.

BNP analyst Philip McNicholas concurs. He believes that in the absence of a deeper adverse shock to either global or regional growth projections, MAS will retain its current policy settings in October, according to the BNP report dated Thursday.

McNicholas also notes that Brexit’s limited impact on global commodity prices, coupled with BNP’s view that official core CPI, which excludes accommodation and private road transport, remains on course to accelerate to an average of 2.0% y-o-y in 2017 undermines arguments for a re-centring of the SGD NEER policy band, says McNicholas.

Nonetheless, Citi’s Kit also warns of “elevated uncertainties and multiple headwinds” in a post-Brexit environment. He notes that Deputy Prime Minister Tharman Shanmugaratnam had pointed out that while Brexit is not expected to result in a significant reduction in Singapore’s growth in the next few years, there could be a “more major impact” if events in Europe coincide with a sharp slowdown in China and the US.

BNP’s McNicholas agrees, noting that the economic repercussions of Brexit had contributed to the bank’s decision to keep its 2016 and 2017 full year GDP growth forecasts.

Moving forward, Citi believes that key data points such as 2Q jobs market data; revised 2Q GDP figures could provide further clues on MAS policy action. In particular, the revised official 2016 GDP forecast range would signal the degree of official caution on the outlook, says Kit, pointing out that 3Q data might prove more critical for the MAS to decide if a change in policy stance is necessary.

This article first appeared in The Edge Singapore Market Report.

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