MAS pauses as growth outlook dims
Following its semi-annual monetary policy meeting on April 14, the Monetary Authority of Singapore (MAS) left its prevailing monetary policy unchanged – including the slope, width and center-point of the band – unchanged. This represents the central bank’s first pause since it began tightening its policy in October 2021. The pause came as a slight surprise to economists, the majority of whom had expected a further hawkish adjustment of the Singapore dollar nominal effective exchange rate (S$NEER) given persistently high inflation and solid, albeit slowing economic growth. The MAS justified the pause by noting that “the current appreciating path of the S$NEER policy bank is sufficiently tight and appropriate for securing medium term price stability”.
Surprisingly less hawkish:
Singapore’s economy witnessed a robust rebound in 2022 following the removal of Covid restrictions, but growth has subsequently faded as domestic and international demand has slowed. The advanced Q1-23 GDP, also released on April 14, showed the economy had contracted by 0.7%q/q (+0.1%y/y) as weak exports and manufacturing offset solid domestic and tourist spending. The MAS believes that “prospects for Singapore’s GDP growth this year have… dimmed” as weaker international electronics demand and tighter global financial conditions will weigh on global economic activity. The central bank left its 2023 GDP forecast unchanged at a below trend range of 0.5% – 2.5% compared to growth of 3.6% in 2022.
In contrast, core inflation remained elevated at 5.5%y/y in February 2023 as sticky services inflation and tax hikes offset falls in energy prices. Nevertheless, the MAS believes inflation has peaked and “is expected to slow more discernibly in the second half of this year” as imported inflation declines and wages ease on lower labor demand. The MAS now forecasts core inflation to decline to approximately 2.5%y/y by the end of 2023, which would be close to historic averages.
Following the announcement, the SGD weakened slightly versus the USD, while the S$NEER slipped from the top of its trading band, closer to the mid-point. In contrast, Singapore government bonds actually increased and the curve steepened following overnight movements in US Treasuries.
The MAS was one of the first central banks to start hiking rates as inflation started to creep higher, so we think it makes sense it would be among the first to pause. Being a small and open economy, Singapore is highly exposed to global growth and inflation trends. As global growth has weakened and global inflation peaked, this will directly and rapidly impact Singapore. The MAS recognized these trends, noting that “growth is projected to be below trend this year” and imported inflation is “turning more negative”.
In addition, given the substantial amount of policy tightening already implemented by the central bank, which is “still working through the economy and should dampen inflation further”, the MAS believes a pause is reasonable. While the statement was mildly dovish, the central bank remains committed to “vigilance over developments in the economic and financial markets, amid heightened uncertainty on both growth and inflation”.
For SGD cash investors, the current, decade-high yields present a relatively excellent opportunity to achieve robust returns on cash investments. Nevertheless, we believe robust diversification across tenors and instruments remain important to help achieving an optimal risk-return strategy.