The Monetary Authority of Singapore (MAS) has announced an off-cycle re-centering of the SGD NEER policy band at the prevailing rate despite a disappointing 2Q22 GDP print. The slope and width of the policy band remains unchanged. This is the second off-cycle tightening this year and the move represents the fourth round of tightening of FX policy that started in October 2021.
Hawkish off-cycle tightening by the MAS reinforces our conviction of a resilient SGD
Source: Bloomberg, Bank of Singapore
Inflation continues to run strong and keep pressure on central banks to remain aggressive, although there is some hope that inflationary pressures are starting to abate as commodity prices fall. The MAS raised its headline and core inflation forecasts for 2022 by 50bp each to 5.0%-6.0% (vs. 4.5%-5.5%) and 3.0%-4.0% (vs. 2.5%-3.5%) respectively.
With the monetary hiking jog becoming a sprint globally -- the Bank of Canada increased its policy rate by a surprisingly large 100 basis points to 2.5% overnight – it would seem out of line for the MAS to wait till its scheduled October meeting to further tighten FX policy. Within Asia, Singapore and Korea are most advanced in the sequence of monetary policy tightening. But other Asian countries are starting to catch up, as the Philippines central bank hiked by 75bp in its first inter-meeting hike, showing its "unwavering commitment" to bring inflation back to the target range.
Inflation continues to run strong and keep pressure on the MAS to tighten
Source: Bloomberg, Singstat, Bank of Singapore
Despite border re-opening tailwinds to economic growth, Singapore’s growth outlook is set to become more mixed in 2H22 in a world of a Chinese recovery and a US/Europe slowdown. That said, we expect the MAS to maintain a hawkish bias given that it has historically been more focused on taming inflation. The MAS would probably want to see more signs that slower growth and reduced supply-chain disruptions are bringing down inflation pressures before taking its foot off the tightening pedal. Given that the MAS has now re-centered the policy band, another re-centering at the regular October 2022 policy announcement is currently not our base case. Our view is that the MAS is likely to tighten FX policy further and we see at least a slope increase in October 2022.
It will be tough for the SGD to defy the strong USD backdrop for the time being. The USD is overvalued but is still the best of the bad lot; the greenback will likely remain on the front foot going into 3Q22. The June US CPI came in stronger than expected, heightening prospects of a bigger Fed rate hike later this month of at least 75bp or even 100bp (rather than just 50bp or 75bp).
The hawkish off-cycle tightening by the MAS does reinforce our conviction that the SGD is likely to remain resilient in the region and against other major currencies like the EUR and JPY. A sustained turn lower in the USD in 6-12 months’ time is possible as US growth and Fed tightening slow. We maintain our 12-month USDSGD forecast at 1.35.
Banner image source: AFP
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