Singapore: MAS eases policy, next move depends on Trump’s tariff plans

Key Points

 

 

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• MAS loosens its tight policy setting today via reducing slightly the slope of the S$NEER (i.e. slightly reduce the pace of S$NEER appreciation). There is no change to the width of the S$NEER policy band or the level at which it was centred. This is in line with our expectation. Indeed, disinflation trend has been well-entrenched, while global economic uncertainties around US tariff policy has risen since the last quarterly meeting in October. We estimate the slope of the currency band has now been lowered to 1% per annum, from 1.5% before the policy meeting. MAS assesses that this measured adjustment to its policy band is consistent with a modest and gradual appreciation path of the currency band that will ensure medium-term price stability.  
• We expect the MAS will now adopt a wait-and-see approach while it seeks clarity from Trump’s tariff policy. Trump has so far mentioned only a 10% tariff on China imports on 1 February, which is less aggressive than the 60% he had threatened during his election campaign. For every 10% tariff increase on China, we estimate the potential spillover impact on Singapore’s GDP would be a 0.2ppt decline. Today’s policy adjustment has not only reflected the step-down in Singapore’s core inflation (at 1.8%yoy in December) to the MAS soft inflation target of “under 2%”, but it has likely provided some buffer against a potential 10% tariff on China on 1 February.
• Ultimately, the next MAS policy move will be highly dependent on the nature of tariffs, the time period that it will come through, and the macroeconomic environment at which time the tariff is implemented, if any. Indeed, Singapore’s small and open economy means that it is highly vulnerable to US tariff hikes on China and a slowdown in global growth. The central bank expects Singapore’s economic growth to slow to 1.0%-3.0% range this year, from 4.0% in 2024. According to the MAS, global economic policy uncertainty has risen since its October monetary policy review, mainly reflecting market expectations of increasing trade policy frictions. Rising trade protectionism will be a drag on manufacturing and trade related investments. Trump’s other policies on domestic tax cuts and tighter immigration rules could also have implications on US inflation and the Fed’s monetary policy, which will influence Singapore’s policy decisions.
• However, in a worst-case scenario where there’s a significant rise in tariffs, which is not our baseline, the MAS would loosen its policy setting further, potentially flattening the slope of the S$NEER policy band and re-centring the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band down to the then-prevailing level of the S$NEER. A sharp slowdown in economic growth would also likely require a broader macroeconomic policy response – so, not just monetary policy easing, but also a fiscal response.
• Meanwhile, the central bank has also revised down its core inflation projection for 2025 to the 1%-2% range, from 1.5%-2.5% previously. Disinflation trend has been well entrenched, with the pace of inflation moderating across a broad range of goods and services. Notably, core inflation (at 1.8%yoy in December) has moderated at a faster pace than what the central bank had expected, reflecting low and stable underlying price pressures in the Singapore economy. We forecast Singapore’s core inflation will ease to an average of 1.5% this year, from an estimated 2.7% in 2024. The labour market has become less tight, growth in unit labour costs have slowed, while oil prices could decline according to EIA’s latest energy outlook. A slowdown in the global economy in response to tariffs could lead to a faster pace of disinflation than what we expect for this year.
• With long US dollar positioning looking stretched, the US dollar is thus vulnerable to a less aggressive tariff hike by Trump. Also, Trump has ramped up the pressure on the Fed, demanding that interest rates to drop immediately. The upward momentum in USDSGD has eased, with the pair falling below the 1.3500-level. For now, we maintain our forecast for USDSGD at 1.3800-level by end-Q1 in anticipation of increasing trade frictions. There may be opportunities in using options to take advantage of potential volatility and SGD weakness amid still heightened global trade uncertainties. With the Fed only looking for 2 rate cuts this year, along with the US dollar likely to be relatively firm amid global uncertainties, we see scope for Singapore’s 3-month compounded SORA to end the year at 2.6%, versus current rate at 2.9%.