VIEW: DBS Flag Balancing Act For MAS

DBS note that “while the focus of MAS pre-emptive and decision monetary actions since last October has been on keeping imported inflation at bay, something which an exchange rate based monetary policy is highly effective against, the challenge in the coming quarters will be somewhat different. Output gap is becoming increasingly more positive. With the labour market being so tight, wage growth will likely stoke a second order impact on inflation. That is, inflation will increasingly become more domestically driven. While an interest rate regime adopted by most central banks around the world will be effective in directly taming domestic inflation, the impact of an exchange rate based monetary policy on domestic inflation would be less direct. The challenge for the MAS would be maintaining the balance between the slowing growth momentum in the economy and the inflationary pressure built up within. Perhaps an equilibrium will be reached when the economy cools to the point where domestic wage pressure eases. But between then and now, the risk of a wage-price spiral exists, and hence the need to anchor inflation expectation. Whether the latest move will be sufficient to achieve that remains to be seen.”