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MAS assuming the brace position

At its 14 April policy review, the Monetary Authority of Singapore surprised markets by maintaining “the prevailing rate of appreciation” of the SGD NEER. The MAS also held the width and center of the currency band steady. This reflected the MAS’ relatively more downbeat view of global and domestic growth, and expectations inflation will slow materially over 2023 (see below for more details). In the words of the MAS, given the “intensifying risks” to growth and unfolding turn in inflation, it judges the current SGD NEER appreciation path “is sufficiently tight and appropriate for securing medium-term price stability”. As the table below illustrates, this is the first time the MAS hasn’t tightened conditions via a change in the SGD NEER since April 2021.

In our judgement, the MAS’ more cautious approach, combined with our outlook looking for global growth to decelerate meaningfully over Q2/Q3 as higher interest rates and tighter credit conditions bite could open the door for the MAS to ease policy at its next meeting in October (see Market Musings: Buckle up, volatility should continue).

The SGD has softened, and USD/SGD has edged a little higher following the surprise ‘on hold’ MAS decision. Given the current weaker USD environment stemming from expectations that the run of soft US economic data could see the US Federal Reserve soon end its rate hiking cycle, we doubt the bounce in USD/SGD will extend too far. In our opinion, the crosscurrents at work are likely to keep USD/SGD contained within its 1.3150-1.3450 range for a while. That said, we think the weaker global growth backdrop, combined with our thoughts that the ECB still has more work to do to bring down Eurozone inflation, that the Bank of Japan could be about to embark on a long overdue policy normalisation path, and the rising odds the next move by the MAS could be to ease policy, should see EUR and JPY outperform the SGD over coming months. Specifically, we believe EUR/SGD has scope to move up towards its April 2022 highs (~1.4877) over the period ahead.

The MAS’ updated macro views

According to the MAS, “Singapore’s GDP growth is projected to moderate significantly this year, in line with the global goods and investment cycle downturn”. Data also released today shows that 2023 got off to a very weak start, with Singapore GDP contracting by 0.7% in Q1.

This weakness in activity should continue. Given its openness, Singapore’s economic performance is heavily linked to global trade and production trends. As our chart shows, various forward indicators for global industrial activity point to below average growth over Q2/Q3. The large jump in interest rates around the world over the past year should constrain consumer and business spending. At the same time, inventory levels in several major nations, particularly in the US, remain very high after firms look to have overordered after extrapolating the stronger demand during COVID and as they tried to juggle supply-chain disruptions. The inventory glut points to less global production and trade over 2023.

As the MAS stresses, “the drag on global investment and manufacturing from tighter financial conditions will intensify” and “growth in Singapore’s major trading partners will be slower in 2023”. As a result, Singapore GDP is “projected to step down to 0.5–2.5% in 2023, from 3.6% last year”.

On the inflation front, while core inflation (now ~5.5%pa) is predicted to stay high near-term as business costs continue to feed through to consumer prices, it is forecast to “slow more discernibly in the second half of this year”. Without a new shock to global supply, Singapore’s imported inflation should continue to fall given lower commodity prices and the stronger SGD NEER. Concurrently, the outlook for a period of below trend global and domestic growth, and the shift to a ‘negative’ output gap should also help dampen inflation pressures. In the MAS’ opinion, core inflation is expected to slow to ~2.5%pa by end-2023, and if the GST increase was excluded, inflation would be even lower.

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