Monetary Authority of Singapore likely to raise slope of S$NEER policy band to 1 pct pa, says ANZ Research

Monetary Authority of Singapore (MAS) is expected to increase slightly the slope of the S$NEER policy band to 1 percent p.a. from the current 0.5 percent pa at their upcoming semi-annual review, which is expected to take place on October 12, according to the latest report from ANZ Research.

Further, no change is expected to the width of the policy band or the level at which it is centred. The strengthening in the S$NEER towards the upper bound suggests that the market is pricing in a high probability of a tightening move. Ongoing trade tensions between the US and China pose downside growth risks.

However, the Singapore economy continues to expand and GDP growth is expected to be at the top half of the MAS’s forecast range of 2.5-3.5 percent this year. MAS is likely to forecast 2019 growth to be in line with potential. Domestic inflation pressures are slowly building.

"We forecast the MAS Core Inflation to rise past 2 percent y/y towards the end of this year, and stay above that level over the first half of next year," the report commented.

The modest tightening will still leave monetary policy on the accommodative side. Further increases in the slope next year is likely if growth remains at potential and inflation pressures persist. There is a limit to further SGD strength at present, given the S$NEER’s proximity to the upper bound.

That said, by interest rate parity, SGD rates should see downside relative to USD rates. We see scope for a re-widening in USD/SGD swap spreads. Therefore, we recommend paying USD 2Yx2Y IRS vs receiving SGD 2Yx2Y IRS.