News & analysis

The Monetary Authority of Singapore decided to keep the slope of the S$NEER policy band unchanged (~2% per annum), while also maintaining the width and the midpoint of the band in the second quarter.

This outcome was widely expected given core inflation remains elevated, despite tracking moderately below MAS’s projections at an average rate of 3.4% YoY in the first two months of the year, and the economy continues to withstand the tighter monetary stance. On this note, MTI’s advanced estimates (based on two months of data) show that the Singapore economy expanded by 0.1% QoQ in the first quarter, down from 1.2% in 4Q23, but avoiding outright contraction as projected by some analysts.

With MAS leaving their core and headline inflation projections unchanged at 2.5-3.5% and continuing to forecast the economy growing at a pace of 1-3%, we suspect policymakers will maintain the moderate appreciation in the S$NEER rate for the entirety of this year, in line with the consensus.

In fact, only 6 out of 23 respondents expect MAS to flatten the slope of the S$NEER band, while only one participant sees outright loosening through a reduction of the midpoint.

With the S$NEER rate already tracking less than a percent below the upper-bound of the policy band, and further EUR, JPY and MYR depreciation likely in Q2 under our base case, we note risks are now tilted to the upside for our one-month and three-month USDSGD forecasts. However, barring a surprise break in USDJPY above 155 and/or EURUSD below 1.05, we don’t expect USDSGD to return to last year’s highs of 1.37 in the coming months as MAS’s unchanged stance should see the S$NEER rate continue to track close to the upper-bound of its policy band.

MAS expect inflation to remain sticky, growth to pick up 

Although average core inflation in the first two months of the year undershot MAS’s projections due to more modest food and travel-related services inflation, once removing the impact of the GST increase, the sequential pace of underlying inflation was estimated to be unchanged from Q4. Along with an increase in water prices in April, and expectations that certain services, such as education and healthcare, will continue to catch up to higher costs, MAS expects core inflation to prove sticky around current levels north of 3% until Q4. As a result, MAS maintained both its average core and headline inflation projections at 2.5-3.5% this year.

Separately, the advanced GDP report for Q1 was also released this morning and noted by MAS in its policy statement.

Here, growth in the Singapore economy slowed on a sequential basis from 1.2% in Q4 to just 0.1% QoQ in Q1 as faster services growth was offset by slowing momentum in manufacturing and construction. The service sector, which accounts for around two-thirds of the economy, rose 1.2% QoQ, up from 0.3% in the fourth quarter. This was driven by improvements in wholesale and retail trade as well as food services, real estate, and transportation services, primarily as a result of higher tourism flows in Q1. This was partially offset by a contraction in information & communications and finance & business services sectors. Meanwhile, the manufacturing sector contracted 2.9% QoQ in the first quarter, partially reversing its 4.5% expansion in the previous quarter. The construction sector also contracted by 1.7% QoQ, almost completely reversing the 2% expansion recorded in Q4.

Nevertheless, MAS expects economic growth prospects to improve over the course of the year as green shoots appear in global manufacturing, while financial sectors should be supported by looser monetary policy stances heading into 2025. As a result, MAS continues to forecast the economy growing at an average pace of 1-3% this year.

A return to 1.37 in USDSGD is unlikely

With MAS maintaining its core inflation and growth forecasts in Q2 while specifically highlighting near-term persistence in core inflation pressures despite weaker realised data year-to-date, we believe the bar for them to ease remains elevated. As such, we don’t expect MAS to flatten the S$NEER policy band until 2025. This should keep the S$NEER on a steady appreciation path over the course of this year, although we note that the current S$NEER rate tracks above the midpoint of the band and thus has scope to trade sideways in 2H24 as core inflation pressures moderate. Nevertheless, in the short-term, as core inflation pressures remain elevated, we suspect MAS’s stance will maintain the S$NEER rate towards the upper end of the policy band. The slight appreciation required for this will likely be driven against non-dollar components of the S$NEER basket, with our forecasts anticipating further depreciation in EUR, JPY and MYR over the coming months. That said, with the current S$NEER rate less than a percent from the upper bound of its policy band, we suspect MAS will allow USDSGD to partially rally over the coming months to alleviate some of the pressure on the S$NEER.

We doubt this will correspond with USDSGD returning to the highs seen in 4Q23 without EURUSD plumbing below 1.05 and/or USDJPY breaking above 155, risks of which we see as minimal. That said, we now think risks to our one-and-three month forecast of 1.35 are tilted to the upside.

MAS’s unchanged stance should cap USDSGD from climbing back to last year’s highs even as the dollar broadly strengthens 



Simon Harvey, Head of FX Analysis


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