http://www.businesstimes.com.sg/gove...-credit-suisse

MAS to ease S$ policy in April: Credit Suisse

But other economists expect central bank to keep unit on appreciating path

By Kelly Tay

[email protected]@KellyTayBT

13 Jan


CREDIT Suisse now believes that Singapore's central bank will ease monetary policy in April, considering the country's weaker inflation outlook and subdued GDP (gross domestic product) growth prospects.

But economists from other banks disagree - their base case scenario is for the Monetary Authority of Singapore (MAS) to maintain its current policy stance of a "modest and gradual" appreciation of the Singapore dollar.

Explaining their contrarian view, Credit Suisse economist Michael Wan and currency analysts Ray Farris and Trang Thuy Le said in a research note on Monday: "With headline inflation likely to remain subdued over 2015, and growth expected to be weak at least in the near term, we believe that a reduced slope - from our (foreign exchange) team's current estimated 2 per cent per annum to around 0.5-1 per cent per annum - is the most likely outcome of MAS's policy meeting in April.

"The next most likely outcome is a shift to an outright neutral and zero pace of appreciation. The conditions for this would be if economic activity in Q1 moderates further, perhaps a decline of more than 2 per cent quarter-on-quarter annualised, or the unemployment rate rises closer to 2.5 per cent from 2 per cent."

But other private-sector economists told The Business Times that such expectations for monetary policy easing are premature, given that the labour market continues to remain tight, and concerns about the pass-through of costs to consumers still persist.

Said CIMB economist Song Seng Wun: "I can see where (Credit Suisse) is coming from, but at this point I think (economic) conditions are still within the policy parameters. Unless there's a very significant shift in the external growth environment which leads to a big change in inflation expectations, I don't think easing will happen in April."

Apart from Mr Song, several economists - including Mizuho's Vishnu Varathan, UOB's Francis Tan, and Bank of America Merrill Lynch's Chua Hak Bin - said that while they agree with Credit Suisse's rationale for expecting an easing in monetary policy, they don't think conditions are that dire yet.

Said Dr Chua: "I am in agreement with the argument, and we are pencilling in some probability of them easing in April. But it's not our base case - we'd need to see further confirmation of weakness in growth, and a further slide in core inflation ... MAS has been taking a very strong default stance, so to jump in now to say easing (will happen) seems a bit early."

OCBC's Selena Ling also pointed out that the recent lower-than-expected inflation readings were due in part to the slump in oil prices - a factor "the central bank will be inclined to look past for now".

Added Mr Tan: "Compared to the US dollar, the Sing dollar is quite weak already. Weakening it further may open up upside risks to inflation. (The central bank) is already wary about domestic inflation due to higher business costs - adding imported inflation would just mean a double-whammy."

Still, Citi economists Kit Wei Zheng and Yap Kim Leng had - before Credit Suisse's report on Monday - flagged the rising odds of monetary policy shifts in 2015: "With lacklustre growth against a backdrop of intensifying disinflation, we see a 30-40 per cent chance of a MAS slope reduction in 2015, with stronger conviction over MAS easing requiring cracks in the labour market."

Indeed, the Credit Suisse note also acknowledged that the labour market continues to remain tight, and a still-healthy job market will likely limit the extent of easing by MAS.