MAS: Monitory Authority of Singapore S$NEER: Singapore dollar nominal effective exchange rate
Stronger GDP growth means the output gap will turn increasingly positive next year. Ordinarily, this would start to see inflation pressures building. However, the labour market, which historically has been a key driver of core inflation, has been weak through most of 2017.
Even as employment growth improves in 2018, it will take time for the labour market slack to be absorbed. In addition, the recovery this year has been driven mainly by strong productivity growth, resulting in declining unit labour costs for businesses. This will help keep inflation pressures in check even if wage growth rises.
April is likely to be too early for a move on rates as the MAS would want to see further evidence the economic recovery is broadening. Low inflation over the first half of 2018 allows the MAS to be patient.
Although the inflation outlook is a key factor in the central bank’s deliberations, a neutral policy stance is typically adopted following a substantial tightening in financial conditions.
A sustained easing in financial conditions has been a signal that the MAS could be prepared to exit their neutral stance. ANZ Research believes ideal conditions will be in place by October next year.
Khoon Goh is Head of Asia Research at ANZ