Singapore MAS likely to retain $ policy, or tighten it
Currency strategists expect US$ to hit new all-time lows of S$1.32 to S$1.36 by end-2008
By LARRY WEE
(SINGAPORE) In response to strong price pressures at home and abroad, the Monetary Authority of Singapore is expected to maintain its current policy stance for the trade-weighted Singapore dollar or S$NEER, or even tighten it a notch further, when it issues its semi-annual monetary policy statement next month, say currency strategists.
In its last policy statement on October 10 last year, the MAS left intact its policy of a modest and gradual appreciation of the S$NEER, which has been in place since April 2004, but also decided to ‘increase slightly the slope of the S$NEER policy band’.
In practical terms, currency researchers estimate that this probably raised the annual rate of trend appreciation for the Sing dollar from 2 per cent to closer to 3 per cent currently.
But with price pressures at home and abroad now forcing consumer prices here to 25-year highs in the past two months, there’s a possibility that the MAS may even want to nudge such trend appreciation a notch higher - even if most don’t expect it to re-centre the mid-point of its undisclosed trading bands for the S$NEER, or make any changes to the width of those bands.
CPI readings for the Republic hit 6.6 and 6.5 per cent highs in January and February this year, compared to 4.4 per cent in December last year. And, compared to full-year rises of 1 and 2.1 per cent in 2006 and 2007, the Ministry of Trade and Industry raised its official 2008 forecast for headline CPI to a 4.5 to 5.5 per cent range last month, from an earlier estimate of 3.5 to 4.5 per cent.
Joseph Tan, a senior strategist at Fortis Bank here, sees the local CPI topping out closer to 7 per cent before falling back, but argues that the MAS may well want to raise trend appreciation for S$NEER a touch higher, to a 4 per cent annual rate. In currency terms, this could translate into another new all-time high of S$1.32 vis-a-vis the US dollar by the end of this year.
Explained Mr Tan: ‘I think there’s a real danger that food and energy prices will continue to remain at elevated levels this year; oil prices, for example, may continue to trade above US$100 a barrel even in H2.
‘We also have to remember that price pressures at home are not only coming from the effects of higher GST, but extends to the spillover effects from rising house prices and rentals. I think the MAS will need to check inflation there too - because if the US economy bottoms out later this year, we could well see house prices here shooting up again.’
Barclays Capital’s regional economist Leong Wai Ho concedes that such inflation concerns - and others - have also persuaded him to think in terms of a steady to firmer MAS stance next month.
‘I think it’s no longer just an inflation story, but an issue of cost competitiveness now - which renders policy decision-making even more difficult.’
Mr Leong, who expects the US dollar to finish 2008 closer to S$1.34, pointed to anecdotal evidence such as a Cushman & Wakefield report that Singapore’s office rentals had vaulted 10 notches higher in 2007, to seventh most expensive - surpassing even the rates charged in mid-town Manhattan.
On top of that, he warned, local price pressures have spilled over from the consumer to the production side as well, citing all-time highs in a Q4 2007 URA tender price index.
On balance, however: ‘It’s become less clear that the MAS can tighten further now that external forces have deteriorated faster than expected, due to a rapidly slowing US economy, so we expect them to maintain the current status quo without re-centring or changing the slope of the band,’ said Mr Ho.
Claudio Piron, JP Morgan’s head of Asia forex research, also believes the MAS is likely to retain its current status quo, and his firm is looking for the greenback to finish the year closer to S$1.36 - with risks to the downside of that.
He explained that for the moment, headline inflation remains high, domestic economic conditions are robust in terms of consumer demand and jobs, and external trade hasn’t fallen off a cliff. But should the US slowdown deepen, commodity price pressures could ease later this year.
‘The other thing to point out here is that the S$NEER is somewhat of a blunt tool that may not solve all the price pressure problems - so the authorities here may need to look at some other additional policies to alleviate the pressures faced by those worst-hit by rising prices at home - both on the business and individual level,’ he added.
Since the early 1980s, the MAS has adopted the S$NEER as its main monetary policy tool for offsetting imported price pressures in the very open local economy.
Estimates of the model employed by the MAS to fine-tune the local currency’s international value suggest its current policy of modest and gradual appreciation should translate into trend S$NEER appreciation of approximately 2.5 to 3 per cent per annum - fine-tuned by the local central bank inside estimated trading bands of between 1 and 2 per cent on either side of a gradually rising central value.
Source : Business Times - 31 March 2008
Singapore Property - Buy , Sell , Rent , Invest
Mindy Yong
(+65)91002985
mindy@mindyyong.com
Budget hotel boss makes rich list- Singapore »« CityDev issuing 1st tranche of Islamic bonds by year end
