Signs point to easing bias for Singapore

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Disappointing data could see Singapore's central bank change its tune at next year's monetary policy review, economists say.

Exports in the trade-reliant Southeast Asian city-state missed forecasts in November, data showed Wednesday, with non-oil domestic exports growing 1.6 percent on year, below estimates for a near 4 percent gain.

The data put exports on track for a second consecutive year of contraction, which could pose a serious headwind to 2015 growth, said economists at Australia New Zealand Banking (ANZ). Net exports account for nearly 30 percent of the country's gross domestic product (GDP).

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The report is one of many data prints weighing on Singapore's tight monetary policy; core inflation fell to an eight-month low in October, while a central bank survey on Wednesday showed significant downside risks to growth. Economists now expect fourth-quarter gross domestic product to rise 2.3 percent on year, compared with earlier estimates of a 3.1 percent.

"The dismal tone in high frequency economic prints reinforces our view that growth is clearly slowing in certain sectors in the midst of supply side adjustments, which builds the case for an easing bias," ANZ stated in a note.

"With the disinflationary impulse from the down-move in commodity price (particularly oil), there are downside risks to inflation, translating to an opportunity to return to a more neutral monetary policy stance next April," they added.

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The Monetary Authority of Singapore (MAS) is known for hawkish policy, i.e. its commitment to a strong Singapore dollar. The central bank uses its trade-weighted exchange rate - the Singapore Dollar Nominal Effective Exchange Rate (SGD NEER policy band) - to set monetary policy by changing the slope, width and center of the band. A flatter slope enables gradual slower appreciation or depreciation. The central bank's tightening stance has been in place since April 2012.

A case for ‘de-facto’ easing

Wei Zheng Kit, chief economist of Singapore and Malaysia at Citigroup, sees a 40 percent chance of a slight slope reduction next year if core inflation growth drops below 1.5 percent, adding that easing could also come in other ways.

"Even if MAS does not formally reduce the slope, it could still allow the NEER to fall into the lower half of the band as a form of de-facto easing," he said.

The Singapore dollar has fallen 3.5 percent against the greenback in the past three months against the backdrop of weaker growth.

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"The SGD NEER has fallen further from the upper bound of the trading band in recent months, briefly breaking through our estimated midpoint of the band on 19 November for the first time since March," said Wai Ho Leung, senior regional economist at Barclays.

"We continue expect the SGD NEER to retrace below the midpoint of the band in the months ahead," he added.