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Bank Of America: Baseline: 100bp Slope Increase

SINGAPORE

Bank of America believe that “the most likely policy adjustment in April is for a 100bp increase in the policy slope, from current 1% p.a. to 2%. Given the pipeline of inflationary pressures over the years and MAS' medium-term price stability objectives, MAS' priority should be to raise the slope to slightly-above its new-normal neutral rate of 1.5% p.a. A steeper slope delivers the most durable form of tightening against inflation, and is also consistent with the gradual maturing of the recovery over the year. While MAS, in recent years, had preferred to move in 50bp steps, a stronger dose (100bp) of slope steepening is appropriate given the broadening out of inflation and greater concerns about global inflation than before.”

  • “Re-centering the policy band upwards is a close call in our view. We had previously considered re-centering only as a risk scenario, given the slope change alone is likely to be sufficient in addressing inflation concerns and doing both may risk overtightening policy settings. We continue to be reluctant to call for a re-centering in our baseline for Apr policy and believe it should be preserved for a later stage (for e.g. in Oct policy) if inflation remains elevated at close to 3%. However, we recognize that near-term inflation concerns have shifted higher since Jan policy - especially with regards to global energy and food prices. An immediately stronger exchange rate can, and will, help to filter the pass-through to local prices. As such, we acknowledge that a calibrated re-centering is possible and may also be combined with a slope change. Besides our baseline, the second-most likely adjustment, in our view, is for a slight 50bp increase in the slope and a 100bp below-prevailing re-centering.”
  • “Meanwhile, we cannot rule out the possibility of MAS widening the trading band from +/-2% to +/-3% in view of the increased/anticipated volatility in financial and commodity markets. This option will likely be combined with a slope increase to send a clear signal of tightening, as widening the band itself is a neutral policy change. This combination was last used in Oct 2010 and will likely act as a de-facto re-centering in the near term, while also delivering durable tightening. Likelihood of MAS executing this option will be much higher if not for the fact that MAS has only widened the band twice (in Oct 2001 & Oct 2010) in over two decades.”
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Bank of America believe that “the most likely policy adjustment in April is for a 100bp increase in the policy slope, from current 1% p.a. to 2%. Given the pipeline of inflationary pressures over the years and MAS' medium-term price stability objectives, MAS' priority should be to raise the slope to slightly-above its new-normal neutral rate of 1.5% p.a. A steeper slope delivers the most durable form of tightening against inflation, and is also consistent with the gradual maturing of the recovery over the year. While MAS, in recent years, had preferred to move in 50bp steps, a stronger dose (100bp) of slope steepening is appropriate given the broadening out of inflation and greater concerns about global inflation than before.”

  • “Re-centering the policy band upwards is a close call in our view. We had previously considered re-centering only as a risk scenario, given the slope change alone is likely to be sufficient in addressing inflation concerns and doing both may risk overtightening policy settings. We continue to be reluctant to call for a re-centering in our baseline for Apr policy and believe it should be preserved for a later stage (for e.g. in Oct policy) if inflation remains elevated at close to 3%. However, we recognize that near-term inflation concerns have shifted higher since Jan policy - especially with regards to global energy and food prices. An immediately stronger exchange rate can, and will, help to filter the pass-through to local prices. As such, we acknowledge that a calibrated re-centering is possible and may also be combined with a slope change. Besides our baseline, the second-most likely adjustment, in our view, is for a slight 50bp increase in the slope and a 100bp below-prevailing re-centering.”
  • “Meanwhile, we cannot rule out the possibility of MAS widening the trading band from +/-2% to +/-3% in view of the increased/anticipated volatility in financial and commodity markets. This option will likely be combined with a slope increase to send a clear signal of tightening, as widening the band itself is a neutral policy change. This combination was last used in Oct 2010 and will likely act as a de-facto re-centering in the near term, while also delivering durable tightening. Likelihood of MAS executing this option will be much higher if not for the fact that MAS has only widened the band twice (in Oct 2001 & Oct 2010) in over two decades.”