Central Banks

Will Singapore’s central bank call be a nail-biter?

Stefen Chow | Bloomberg | Getty Images

Singapore's central bank decisions don't usually generate much excitement, but economists are split on whether more easing may be on tap after a surprise move earlier this year.

"It's definitely a closer call than it has been in a while," Daniel Martin, an economist at Capital Economics, said Friday.

"Consumer price inflation is extremely low. I don't see much reason for them not to loosen," he said. "On the other side, they already loosened in January. They may see it as already enough." Martin expects policy easing as wage inflation, one of the Monetary Authority of Singapore's (MAS) key concerns, fell sharply in the fourth quarter. The decision is due Tuesday.

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Rather than use interest rates, Singapore's central bank sets its monetary policy by adjusting an undisclosed trading band for the currency based on a basket of currencies weighted to reflect trade levels with the city-state. The MAS may intervene if the currency moves outside its band.

Usually, the MAS sets policy just twice a year -- in October and April. But in a surprise move, the MAS in January announced that it was reducing the slope of the Singapore dollar's appreciation against the currency basket. The slope was last flattened in 2011 and not only was it the first policy change since April 2012, it was the MAS' first unscheduled statement since 2001.

"They threw the cat among the pigeons with the January off-cycle move," Tim Condon, head of research for Asia at ING Financial, said Friday. "The [January] statement itself sounded pretty definitive that they had done their adjustment, but obviously they've raised expectations that more accommodation may be forthcoming." Condon said ING also expects the MAS will ease.

The usually fairly stable Singapore dollar, also referred to as the Sing, has moved relatively widely since then. Before the MAS' surprise move, the U.S. dollar was fetching around 1.34 . That rose to as high as 1.3939 Singapore dollars in mid-March, before retreating to trade at 1.3575 Sing in Asian trade Friday.

For the April statement, a Reuters poll found 12 out of 25 economists expect the trading band's midpoint to be lowered, while an additional six expect the band to be widened, which may act as a de facto easing.

Hedged bets

"In the past couple of weeks, the expectations curve has moved from easing-heavy to a symmetrical one with analyst forecasts ranged across almost all possible outcomes," strategists at Barclays said in a note Friday. But it added that recent market action suggests positioning is for no change.

"Any easing moves are likely to result in much sharper moves in Singapore dollar asset," said.

Even those who expect easing are hedging their call.

"We expect MAS to ease policy by re-centering the policy band lower," Khoon Goh, senior forex strategist at ANZ, said in a note last week, but he added "we assign a 60 percent probability to this."

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Despite the MAS' easing move in January, financial conditions in the city-state have tightened over the past two months, Goh noted. The three-month Sibor rate is up around 60 basis points so far this year, which be filtering in to mortgage rates, he noted.

Additionally, the advance gross domestic product (GDP) data, which will be released at the same time, will likely show first-quarter growth moderated to 1.8 percent on year from 2.2 percent in the fourth quarter, he said, adding the MAS may also cut its growth outlook.

DBS also expects the policy band will be re-centered lower.

"Given the economy's unusual mix of low growth, no inflation and a tight labor market, this seems the most sen­sible option," Philip Wee, an analyst at DBS, said in a note last week. But Wee is also looking at expectations that the U.S. Federal Reserve will be raising interest rates sometime this year, a development likely to fuel further strength in the U.S. dollar against Asian currencies.

"Re-centering the policy bands lower would provide more room to manage volatility," Wee said.

It's a concern ANZ's Goh is also citing, estimating the MAS used around US$10 billion for foreign-exchange intervention in the three months through February. If the Singapore dollar falls toward the bottom of its trading band, the MAS will be forced to intervene further, Goh said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1