Singapore: MAS Jan 2024 - In no hurry to loosen policy settings

LLOYD CHAN
Senior Currency Analyst

Global Markets Research
Global Markets Division for Asia
T: +65-6918-5536
E: lloyd_chan@sg.mufg.jp

 

 

• The MAS left its monetary policy setting unchanged at its first quarterly review of the year, as core inflation remains high. It will maintain the prevailing rate of appreciation of the S$NEER policy band (MUFG estimate: 1.5% pa) with no change to the width of the band or the level at which it was centered. This is consistent with market consensus and our expectation.
• There are no significant changes to the MAS growth and inflation assessment from its October’s outlook. Authorities still expect GDP growth will improve later this year as global inflation falls and policy settings in major economies loosen. Singapore’s GDP growth is projected at 1-3%, with the output gap becoming less negative in H2 2024. However, MAS warns that the outlook is subject to uncertainties amid ongoing geopolitical conflicts.
• On inflation, authorities project core inflation will moderate to 2.5%-3.5% this year, from 4.2% in 2023. The MAS has also delivered a slightly hawkish policy statement by mentioning that core inflation will likely remain elevated in the earlier part of 2024, before it will step down by Q4. Notably, the policy statement mentioned that core inflation would be 1.5%-2.5% excluding the impact of the 1ppt rise in GST – this is notably near authorities’ soft target of “just under 2%”.
• We think elevated core inflation (3.3% y/y in December) remains a key impediment to easing policy setting. The fight against inflation has not been won, given sticky elements such as COE premiums, water tariff hikes, public transport fare increases, and the 1ppt hike in the Goods and Services (GST) tax. Geopolitical tensions in the Middle East also add to inflation risks.
• Until we see core inflation falling back to 2%, we think the MAS will maintain its tight policy setting. Moreover, there is no rush to loosen policy, as advanced estimates showed Q4 GDP growth accelerated to 1.7% q/q (2.8% y/y) from 1.3% q/q in Q3. Encouragingly, there are signs suggesting core inflation should continue to be on its way down. Global food prices have fallen, while the pace of wage growth is likely to slow amid softening labour market dynamics.
• With inflation broadly moderating, we think the MAS is at peak hawkishness. This suggests there is limited room for the Singapore dollar (SGD) to strengthen further versus the US dollar for now. On a year-to-date basis, the SGD has weakened by 1.7% versus the US dollar. We think once the US Fed starts to cut rates, several Asian currencies including the SGD will strengthen versus the US dollar. We forecast the Singapore dollar will reach SGD1.29/USD by end-2024.