By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
MAS Hold: (Still) Unhurried …
MAS hold was unsurprising, although the guidance was somewhat less emphatically dovish. This explained modest SGD appreciation reaction; to sub-1.34 but within mid-1.33 support. Moreover, a softer USD overnight (which pushed EUR and AUD higher to mid-1.19 and mid-0.76 while USD/JPY was pressured below 109) underpinned sub-1.34 USD/SGD slip.
For the record, the MAS; i) maintained the 0% S$NEER slope% (no appreciation bias); ii) held S$NEER mid-point at March 2020 levels, and; iii) kept the band width (at presumed +/-2%).
So the action was in the statement on economic outlook and policy prognosis. Here it was nuanced, yet notable; as the MAS dropped the “for some time” reference (from Oct) to the pronouncement that “an accommodative policy remains appropriate”. What this means is that as the recovery unfolds, the MAS is at the margin taking a more state-dependent view on maintaining accommodation rather than a time-assured stance; which is probably more appropriate when economic stress and uncertainty are greater.
But equally, this is not at odds with the MAS being unhurried about normalisation as “above-trend (growth) pace” does not distract from the bugbear of uneven recovery; with “sectors worst hit by the crisis will continue to face significant demand shortfalls”.
… & Unfettered (by Growth & Inflation)
As we had expected, and contrary to the consensus for a 0.5% contraction, Singapore’s annual rate of Q1 GDP growth surprised with a modestly positive print of 0.2% (Mizuho: +0.4%). And this feeds into expectations that the “upturn in external demand”, sustaining “above-trend” growth pace will have 2021 growth course to exceed the 4-6% forecast range.
Correspondingly, the MAS expects that headline CPI will step-up to 0.5%-1.5% (from -0.5% to 0.5% previously) given the confluence of the low base and emergent cost-push pressures. Nonetheless, the MAS will be unfettered in its policy accommodation stance. For one, the MAS expects that some dimensions of inflation will be transitory.
Crucially, that spare capacity and slack in an uneven recovery will absorb some of the cost-push and subdue wage-price feedback; consequently dampening underlying inflationary trends, with core CPI only gradually lifted to 0-1%. We concur*.
The upshot is that despite the propensity for near-term growth and inflation gauges to overshoot the trend, the MAS is taking a longer view to account for inherent bumpiness in the recovery path and the unevenness across sectors and lingering uncertainty.
* see Mizuho Insights – MAS Watch: Unhurried & Unfazed, 6th April 2021)
BoK’s Status Quo
Tomorrow, the BoK meets. Like the MAS, it is poised to hold steady; as fiscal policy leads.
For the record, following its previous meeting, BOK committed to;
i) buying KRW7trln worth of bonds in H1 2021 (versus KRW11trn in 2020) and;
ii) KRW13trln loan program to SMEs extended by another six months until end-Sep, underscoring its emphasis on non-rate measures to support growth.
But the BoK will defer to fiscal stimulus even as Covid-19 resurgence threatens to derail the fledging recovery; waiting to assess the bill passed in March approving additional fiscal support worth KRW14.9trn (0.7% of GDP) in form of cash handouts and vaccination funding.
Upshot being, the BOK is set to maintain its dovish stance with targeted non-rate measures to be expanded or extended as necessary to support growth.
Source: Mizuho Bank Ltd