Singapore is set to buck the global easing trend and keep its policy bearings on hold as officials use the strength of the currency to tackle still-exorbitant living costs.
The Monetary Authority of Singapore (MAS) is expected to keep the slope, centre and width of its currency band steady, though policymakers may strike a dovish tone to pave the way for a shift in stance next year when price pressures abate. All but three economists in a Bloomberg survey see no change to policy on Monday, and the bigger-than-average options turnover this week suggests that traders are betting on the currency to strengthen after the decision.
United Overseas Bank (UOB) is one of the handful of analysts who expect an early MAS pivot to easing.
While central banks in the US, Europe and parts of Asia have begun cutting interest rates as inflation drops from its post-pandemic peaks, the deceleration in consumer prices has slowed in Singapore, which imports the lion’s share of basic goods. The MAS uses the exchange rate rather than interest rates to control price growth, guiding the local dollar against a basket of currencies to crimp the cost of imports.
“The conditions are not in place for monetary policy easing just yet,” with services inflation still high, said Khoon Goh, head of Asia research at ANZ Group Holdings. “The earliest that we see the MAS easing is in January 2025.”
See also: Headline inflation eases to 1.4% on y-o-y basis in October; core inflation declines to 2.1%
Singapore is one of four major monetary authorities in the Asia-Pacific region announcing policy decisions in short succession. The Bank of Korea cut its benchmark interest rate in a widely expected move, while New Zealand stepped up the pace of easing this week. India opened the door to its first rate cut in four years.
The MAS’s parameters for the Singapore dollar’s nominal effective exchange rate, or S$NEER, have been unchanged for the past year.
See also: Economists lift their 2024 GDP growth forecasts following positive 3Q2024 GDP growth
Yet factors from the price of oil to central banks in Frankfurt, Beijing and Washington lowering borrowing costs, and the upcoming US Presidential election have implications for Singapore’s growth and the performance of its currency.
The Federal Reserve’s 50-basis point interest rate cut in September drove the Singapore dollar to a decade high against the greenback. Market metrics such as demand for option strikes below the spot rate suggest traders see the local currency continuing to appreciate.
“Since markets are counting down to November with US elections, whose outcome may impact trade tariffs for China and other economies, the geopolitical outlook may also exert some influence on near-term uncertainties,” said Selena Ling, chief economist at Oversea-Chinese Banking Corporation (OCBC).
Having stressed the importance of a strong local dollar in his National Day address in August, Prime Minister Lawrence Wong said in an Oct 2 video message he expected inflation to ease further in coming months, thanks in part to initiatives to curb the cost of living for low-income citizens.
While the core inflation rate, which excludes housing and private transportation costs, fell to its lowest since 2022 in July, it accelerated to 2.7% in August, suggesting that price pressures remain sticky.
“We expect inflation to continue easing to the lower levels that we saw before Covid,” Wong said, echoing the MAS’s July forecast for a discernible drop in core inflation in the fourth quarter and into 2025. “The outlook is favourable.”
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Data due alongside the policy decision is likely to show that Singapore’s growth picked up in the third quarter, helped by household spending and exports. Economists at Goldman Sachs Group expect the MAS to retain its forecast for growth of 2%–3% for this year.
The MAS doesn’t have an explicit inflation target, though it has concluded that a core inflation rate of just under 2% on average “is consistent with overall price stability in the economy”.
“We expect MAS to stay on a 'wait-and-see' mode, especially ahead of the US election,” though officials may forecast a drop in core inflation to below 2% for next year, said Kai Wei Ang, Asean economist at Bank of America.
Infographics: Bloomberg
