SINGAPORE – Analysts from OCBC are expecting the Monetary Authority of Singapore (MAS) to ease its monetary policy stance come its review next month.

“Our base case scenario is for the MAS to ease its monetary policy stance by reducing the slope of the S$NEER (Singapore dollar nominal effective exchange rate) policy band from the currently estimated +1 per cent per annum appreciation path to +0.5 per cent per annum. We expect no change in the width and centre of the policy band,” the analysts said.

S$NEER  is the exchange rate between the Singdollar and a basket of currencies of Singapore’s country’s major trading partners.

OCBC’s forecast is in line with that of DBS analysts, who similarly expect the MAS to slightly decrease the annual appreciation pace of the S$NEER to 0.5 per cent at its policy review in mid-October.

In a research note on Wednesday (Sept 25), the OCBC analysts noted that the ongoing retracement higher of the S$NEER relative to parity is largely driven by external factors, and not a reflection of reduced domestic concerns today, as compared to the pre-August period.

“The recent time path of the S$NEER has been reflective of market focus. Since August, the S$NEER has effectively been on an uptrend relative to its parity level,” the analysts said.

They also noted that the Singapore dollar (SGD) outperformed its Asian counterparts amid renminbi-led weakness as the Sino-US trade tensions escalated in August, keeping the S$NEER buoyed. Subsequently, the alleviation of tensions from September onwards saw the SGD recover against the US dollar and the yen, providing further support for the S$NEER.

“Contrast that to the period between late-June and August, where the S$NEER was on an easing trend (from an estimated +1.8 per cent above parity to near-parity levels) as the market focused on a softening domestic economy.

“Despite the soft domestic and global growth/inflation narrative, the S$NEER is still effectively flat year to date. There is room for the S$NEER to ease lower to provide the stimulus required for the economy,” the analysts explained.

Since the April monetary policy statement, domestic growth or inflation outcomes have softened steadily, underlying the “slightly below potential” prognosis, the report highlighted.

“The downward revision of the 2019 official growth forecast in August to zero to 1 per cent year on year (from 1.5 to 2.5 per cent year on year in May 2019) probably best encapsulates the loss of momentum. A wide range of indicators, ranging from PMIs (purchasing managers’ index) to NODX (non-oil domestic exports), also point towards a slowdown.”

Globally, PMIs have also continued to lose traction, while the composite leading indicators show no signs of bottoming. Headline and core inflation prints are essentially flat lined, and it remains too early to expect a global growth rebound to carry the Singapore economy, the report showed.

Arguably, the ongoing Sino-US rapprochement is a slight bright spot for the global economy, but without a concrete truce to at least nominally lock down progress on this front, the situation may be too fragile to generate sustained optimism, according to the OCBC analysts.

Therefore, they are of the view that MAS should undertake some form of easing action, with the question being the extent of easing.

“While the risk of a more dovish move to a zero rate of appreciation cannot be fully discounted, we think this drastic step may not be warranted for now. Taking this step would imply an official economic prognosis that is considerably worse than our expectation, or expected to deteriorate rapidly from here.

“Granted that the economic indicators have softened, it is insufficient to characterise the situation as a severe dislocation of the economy. On balance, we think a measured easing action to an estimated +0.5 per cent per annum appreciation path may be the most likely scenario.”