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Singapore's Budget Makes Next Central Bank Move Tricky

Published 20/02/2019, 08:00 am
Updated 20/02/2019, 04:32 pm
© Bloomberg. Bridges stand in front of the Marina Bay Sands hotel and casino in Singapore, on Sunday, June 3, 2018. U.S. President Donald Trump and North Korean leader Kim Jong Un are due to meet in the city on June 12. Photographer: Nicky Loh/Bloomberg

© Bloomberg. Bridges stand in front of the Marina Bay Sands hotel and casino in Singapore, on Sunday, June 3, 2018. U.S. President Donald Trump and North Korean leader Kim Jong Un are due to meet in the city on June 12. Photographer: Nicky Loh/Bloomberg

(Bloomberg) -- Singapore’s expansionary budget for the coming year makes the central bank’s April policy decision slightly more complicated.

The Monetary Authority of Singapore will need to decide whether to tighten policy in the face of steady economic growth and greater fiscal spending, or hold its stance because of growing global risks.

“The case for further monetary policy tightening is diminishing,” with weaker economic growth and trade data adding downside risks to the 2019 outlook, said Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch (NYSE:BAC) in Singapore.

The decision is still a “live” one though, he said, and the MAS “could surprise the market with a hawkish bias” given solid growth rates and core inflation at or above the historical average of 1.7 percent.

The MAS tightened policy in both of its scheduled decisions last year, buoyed by underlying demand even as they cited U.S.-China trade tensions as a major risk to the outlook. With talks to resolve the dispute still ongoing and a wave of dovishness overtaking central banks this year, Singapore’s policy makers may have reason to pause.

Unlike most developed nations, the MAS uses the currency rather than interest rates to conduct policy. It guides the Singapore dollar against a basket of its counterparts and adjusts the pace of the appreciation or depreciation by changing the slope, width and center of a currency band. The MAS doesn’t disclose details of the basket, or the band or the pace of appreciation or depreciation.

Citigroup Inc (NYSE:C). Wei Zheng Kit still sees the chance of tightening in April, given “medium-term pressures on inflation” from the planned goods-and-services tax hike, fiscal support, resilient domestic demand, and a tight labor market.

Nomura Holdings Inc. said the MAS decision is going to be more of a close call, with the expansionary budget “marginally” increasing the probability of policy tightening, but risks are “still tilted towards a pause” given global uncertainty about trade and a slowdown in China.

While the MAS core inflation rate is picking up -- it rose to 1.9 percent year-on-year in December from 1.7 percent in the prior month -- growth in the trade-reliant economy is weakening. Officials forecast expansion will slow to the lower half of a 1.5-3.5 percent range this year.

Any surprises in that data between now and the April decision could be the real determinant for the MAS. Sanjay Mathur, an economist at Australia & New Zealand Banking Group Ltd., bets that the budget won’t even factor at the policy makers’ gathering.

“The stimulatory impact of expansionary budgets in Singapore is low,” he said.

© Bloomberg. Bridges stand in front of the Marina Bay Sands hotel and casino in Singapore, on Sunday, June 3, 2018. U.S. President Donald Trump and North Korean leader Kim Jong Un are due to meet in the city on June 12. Photographer: Nicky Loh/Bloomberg

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