SINGAPORE’S central bank left monetary policy settings unchanged on Monday (Jan 29), extending the pause from its 2023 meetings and maintaining a hawkish tone, in line with market expectations.

Economists noted that the Monetary Authority of Singapore (MAS) sounded more upbeat on growth and more cautious on inflation, even as it lowered its full-year forecast for headline – but not core – inflation.

In the first decision of its new quarterly schedule, MAS maintained the prevailing rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, with no change to its width nor the level at which it is centred.

Current monetary policy settings remain “appropriate”, said MAS, as the sustained appreciation of the policy band will continue to dampen imported inflation and curb domestic cost pressures.

But this marks a contrast with its last decision in October 2023, when policy settings were deemed “sufficiently tight”, observed economists. Said Bank of America (BOA) Asia and Asean economist Ang Kai Wei: “This suggests that effects of past policy moves have largely faded off.”

For HSBC head of Asia FX research Joey Chew, this changed wording “removes the small easing bias from before”.

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All 19 analysts in a Bloomberg poll had expected MAS to hold policy settings unchanged in January amid persistent inflation, with most also anticipating an unchanged tone regarding the inflation outlook.

In its most recent inflation outlook, MAS did not provide an updated 2024 headline inflation forecast, saying that it would do so in January’s monetary policy statement. The previous forecast range was 3 to 4 per cent. MAS has lowered this to 2.5 to 3.5 per cent, amid declines in Certificate of Entitlement (COE) premiums since November and the larger COE supply this year.

But it maintained its previous forecast range of 2.5 to 3.5 per cent for full-year core inflation, which excludes accommodation and private transport, and is more relevant to MAS decisions.

The last monetary policy change – the final of five consecutive tightening moves – was in October 2022, when the midpoint of the S$NEER policy band was re-centred to the prevailing level then, with no change to its slope or width.

Upbeat on growth

Economists highlighted MAS’ more hawkish tone in Monday’s statement, which implies that a loosening of policy is unlikely.

Said HSBC’s Chew: “The MAS sounded more confident about a global soft landing.”

On Monday, MAS said: “Barring any further global shocks, the Singapore economy is expected to strengthen in 2024, with growth becoming more broad-based.” This is in contrast to its October statement, where it expected the economy to “improve gradually over 2024”, noted Chew.

BOA’s Ang added: “Earlier references to the uncertain global economic outlook and the possibility of weaker than expected domestic recovery were omitted.”

Also removed was rhetoric about growth being “muted in the near term”, added RHB acting group chief economist Barnabas Gan.

Economists observed that MAS now expects the slightly negative output gap in 2023 to narrow in H2 2024, versus its October guidance that the gap would remain “slightly negative” this year.

Advance estimates showed that the Singapore economy grew 1.2 per cent year on year in 2023, pulled up by the final quarter’s stronger growth. The official growth forecast for 2024 is 1 to 3 per cent.

As for inflation, MAS said on Monday that core inflation “is likely to remain elevated in the earlier part of the year, but should decline gradually and step down by Q4, before falling further next year”.

Core inflation is expected to rise in Q1 due to hikes of the goods and services tax (GST) and carbon tax rates. “Setting aside the transitory impact of the GST increase, core inflation is forecast to decline gradually over 2024,” said MAS, adding that this moderation should be underpinned by lower imported costs and a slower pace of domestic cost increases.

The reference to a gradual decline is less dovish compared to October, when MAS expected inflation to “broadly decline”, said Chew.

Maybank analysts Dr Chua Hak Bin and Brian Lee see MAS as being “more cautious” on inflation, as it now forecasts that core inflation will “step down” by Q4, in contrast to its October view that inflation “should be on a broad moderating trend” this year.

Holding the pause

HSBC, RHB and BOA agreed that MAS is likely to stand pat at this year’s meetings, which Gan credited to inflation risks and a resilient economic backdrop.

“MAS is in ‘cruise control’ mode now,” said HSBC’s Chew.

RHB, BOA and Maybank economists noted, however, that persistent or higher-than-expected inflation may lead to further policy tightening – though this is not their base case scenario.

Ang saw the possibility of a 50-basis-point slope steepening in April, while Gan cautioned of “a further tightening bias in H2”.

In contrast, SMBC and Maybank believe that MAS will stand pat in April and July, but expect easing in October.

The Maybank economists continue to expect a flattening of the S$NEER slope, but see the probability as “slightly lower” now that MAS expects the output gap to narrow.

SMBC Asia FX watcher Ryota Abe saw MAS’ unchanged policy as a recognition of the need to control imported inflation. “Overall, while inflation has slowed as expected, the risk of it accelerating in the short term prevails,” he said.

MAS is likely to wait until October to ease policy, as it needs to confirm that inflation falls sufficiently, he added. “If inflation deviates from its expected path, MAS could maintain its policy through 2024.”