Risk of Singapore central bank easing seen rising on growth woes

The possibility of Singapore's central bank easing monetary policy at its scheduled policy review in April is rising, analysts say, as weak economic data points to a worsening outlook for growth. 

PHOTO: BLOOMBERG

FEB 12, 20162:43 PM

[SINGAPORE] The possibility of Singapore's central bank easing monetary policy at its scheduled policy review in April is rising, analysts say, as weak economic data points to a worsening outlook for growth.

A batch of indicators released last month showed the city-state's economy ended 2015 on a lacklustre note, adding to worries that global headwinds will keep the trade-dependent economy on a wobbly footing in 2016.

In 2015, exports fell 0.1 per cent, the third straight year of annual decline, while industrial production suffered its biggest year-on-year slump in eight months in December.

"The probability of Singapore slipping into recession...is increasing," said Hak Bin Chua, ASEAN economist for Bank of America Merrill Lynch.

While the baseline scenario is for the Monetary Authority of Singapore (MAS) to keep its exchange-rate based monetary policy unchanged at its semi-annual policy meeting in April, the chances of easing have grown, Mr Chua added.

Against a backdrop of sliding oil prices and uncertainty over the global economy, a number of central banks have eased policy in recent weeks to counter downside risks to growth and inflation.

In Asia, Indonesia's central bank cut interest rates in January to lift its economy, while the Bank of Japan stunned markets by adopting negative interest rates.

To be sure, Singapore is not at immediate risk of a recession, even accounting for the possibility of some downward revision to fourth-quarter gross domestic product.

The city-state's economy bounced back to positive growth in the last two quarters of 2015 after contracting in the April-June quarter.

GDP expanded at an annualised 5.7 per cent in October-December from the previous quarter, as services sector growth helped offset weakness in manufacturing, according to the government's advance estimate. More detailed GDP data is due later this month.

"The big question now is whether services can continue to hold up in the face of a deepening manufacturing recession,"said Mr Chua at Bank of America Merrill Lynch.

In a worrying sign, a recent government survey showed that business sentiment in the services sector has fallen to a four-year low.

Sentiment among manufacturers is at its weakest since 2009 - the year Singapore's economy was hit by the global financial crisis and contracted 0.6 per cent.

Manufacturing weakness means the prospect of a recession in the first half of 2016 is rising, HSBC economist Joseph Incalcaterra said in a recent research note, adding that the trend over the past few years has been for services output to moderate in the first half.

The MAS manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate (S$NEER).

It now has a policy of 'modest and gradual' appreciation of the S$NEER policy band. One easing option is to flatten the upward slope of the band.

"Our base case is for no change, but there is a high probability of the MAS adopting a flat slope if a recession is on the cards," said HSBC's Mr Incalcaterra.

Singapore's central bank eased monetary policy twice last year, once at an unscheduled policy decision in January 2015.

The MAS is seen as unlikely to opt for another off-cycle policy easing unless China's economy clearly takes a turn for the worse, or oil prices keep sliding.

REUTERS