Heightened growth risks and weak domestic growth point towards scope for the monetary authority to ease policy but the current low inflation environment reflected the effects of low energy and commodity prices.
MAS is usually preoccupied with the inflation outlook, and commodities are recently having resurgence. The Bloomberg Commodity Index rose to a two-month high last Friday, whereas Brent crude prices nearly challenged the $55 mark. This means that the medium-term outlook for inflation in Singapore may be looking up, despite the latest dip into deflation at -0.8% y/y in August.
The mixed forecast for what MAS will do suggest that the decision will be a close call. Another consideration for MAS is that the Federal Reserve has not yet raise interest rates.
If MAS leaves policy unchanged
Given there is a sizable contingent expecting some form of easing, notably re-centring of the policy band, an unchanged decision could send the SGD higher. But it is hard to see how a stronger SGD would sustain amid tepid growth momentum. Moreover, the Fed is still looking for a rate hike this year, which will keep the greenback firm. This means any USD/SGD declines will be met with good support.
If MAS eases policy
A number of analysts see a re-centring of the S$NEER midpoint lower as the most likely easing approach. ANZ noted that in the previous occasions where MAS re-centred lower, the common conditions were that policy was at neutral, S$NEER was trading close to or at the lower bound, and that there was an adverse external shock. This time round, the MAS is still maintaining a positive slope, indicating a modest and gradual appreciation stance.
In the event that MAS eases policy, we would see an initial weakening of SGD. USD/SGD may rose towards 1.45 from the current 1.40 levels. The current retreat in USD/SGD from the six-year highs of 1.4328 may position the pair for a rebound. The 1.3945-1.3955 region remains a good support area. Any pullbacks close to these levels may present good entry opportunities.