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Singapore CB Wary of Subdued Inflation, Weak Labor Market

Singapore CB Wary of Subdued Inflation, Weak Labor MarketSingapore CB Wary of Subdued Inflation, Weak Labor Market

The country’s economic data may have perked up of late but the Monetary Authority of Singapore is unlikely to make its next policy move—widely seen as a tightening—at the biannual review this week, said economists.

That is because the central bank remains wary of subdued inflationary pressures and softness in the local labor market. As such, most economists think the MAS will opt to keep its powder dry for now, CNA reported.

Rather than setting interest rates, the MAS manages the economy through the currency by allowing the exchange rate to float within an unspecified policy band and changes the slope, width and center of that band when it wants to adjust the pace of appreciation or depreciation of the Singapore dollar.

At its previous meeting in April, the central bank, which meets twice a year, said it would maintain a neutral policy stance for an “extended period”.

This comes despite a turnaround in Singapore’s growth numbers this year. Thanks to an improving global economy, the manufacturing sector has outperformed since the final quarter of 2016, benefiting some trade-related sectors and helping to lift overall growth.

However, this will unlikely be enough to nudge the MAS into tweaking its exchange-rate based policy this week, most economists said.

One key factor is the lack of a convincing recovery in the broader economy, with strength coming “only from pockets of Singapore’s economy”, according to United Overseas Bank economist Francis Tan.

Beyond key growth segments in the manufacturing sector such as semiconductors and precision engineering clusters, Tan noted that growth in other clusters including the offshore and marine, continued to be limp.

Domestic consumption and investment also remained weak. In particular, the latter’s 7.3% year-on-year decline over the second quarter “nearly rivals the weakness last seen during the Global Financial Crisis” – a fall of 7.7% in the fourth quarter of 2008.

“Real GDP growth is only showing the first signs of green shoots. It is better to err on the side of caution and for monetary and fiscal policies to remain accommodative,” Tan added.

Meanwhile, core inflation—a major policy consideration for the MAS—remains contained within the central bank’s official parameters of 1 to 2%, said Oversea-Chinese Banking Corporation Bank’s head of treasury research and strategy Selena Ling.

As such, the central bank is likely to leave its policy stance unchanged in October but “leave the door open in 2018, awaiting core inflation cues”.

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