Weekly Market Focus

No surprises from MAS on policy front

Selena Ling
Head, Treasury Research & Strategy
Member of OCBC Wealth Panel

Singapore’s first quarter GDP expanded by 2.5 per cent yoy (-1.9 per cent qoq saar) for 2017, close to our forecast of 2.4 per cent yoy (-1.7 per cent qoq saar), and a moderation from 2.9 per cent yoy (+12.3 per cent qoq saar) seen in 4Q16.

Manufacturing outperformed (+6.6 per cent yoy), followed by services (+1.5 per cent yoy) whereas construction was the laggard (-1.1 per cent yoy) in 1Q17. Going by q-o-q terms, both manufacturing and services sectors moderated 6.6 per cent and 2.2 per cent from the strong 4Q16.

MAS also left its monetary policy stance unchanged at a neutral policy for an extended period, with the band width and centre also static, citing that the current band provides flexibility for inflation weakness. The official growth and inflation forecasts were left unchanged at 1-3 per cent and 0.5-1.5 per cent yoy respectively, with core inflation remaining at 1-2 per cent as well.

MAS noted in its statement that the global outlook has improved slightly since the October 2016 MPS but Singapore’s growth at 1-3 per cent this year will not be markedly different from 2 per cent in 2016. For inflation, energy-related components are the key drivers of the pickup in pricing power, coupled with some administrative price adjustments (namely car park charges and household refuse collection fees from December 2016 and January 2017, as well as upcoming hikes in water prices and S&CC) which will contribute to a temporary increase in CPI, but demand-driven inflationary pressures will be restrained, and core inflation is expected to trend towards but average slightly below 2 per cent over the medium-term.

In our view, the extended period for monetary policy will extend to at least October 2017. Our house forecast remains at 2 per cent for GDP growth and 1.0 per cent and 1.6 per cent for headline and core inflation forecasts respectively. The green shoots remain less than broad-based and inflationary pressures are mainly arising from higher oil prices and domestic policy-driven pricing pressures. Despite the healthy manufacturing clip, the rest of the manufacturing sector is tipped to “remain patchy” apart from the domestic semiconductor and precision engineering industries. Note construction saw its third straight quarter of on-year contraction due to weakness in private sector construction activities and another contraction in 2Q17 looks plausible. Housing rents are also tipped to continue to decline this year, and the lacklustre domestic environment will deter businesses from fully passing on higher costs to consumers.

Domestic SGD interest rates, especially at the front end of the curve, remains reluctant to follow LIBOR higher, notwithstanding the FOMC’s gradual policy normalization trajectory. With the SGD NEER bearing the brunt of the adjustments from the unwinding of the Trump trade as far as the USD is concerned, and the MAS maintaining its neutral policy stance for an extended period, the potential for SIBOR and SOR to stay subdued for longer remains a risk at this juncture.

While we anticipate that the FOMC may deliver at least another two 25bp rate hikes this year, our end-2017 forecast for 3-month SIBOR and SOR had been revised to 1.25 per cent and 1.35 per cent respectively.