Singapore: MAS eases monetary policy at its first semi-annual meeting in March
The Monetary Authority of Singapore (MAS) moved forward its biannual meeting to 30 March due to the Covid-19 pandemic. At the meeting, the MAS moved from targeting a slight currency appreciation to targeting a zero percent annual rate of appreciation of the policy band at the prevailing level of the Singapore dollar nominal effective exchange rate (S$NEER), effectively loosening its monetary stance. The width of the policy band was left unchanged. The Singapore dollar is managed against a basket of currencies and the MAS operates a managed float regime, with the currency fluctuating within a policy band where the level and direction is decided by the Authority to accommodate short-term volatility in foreign exchange markets as well as ensure medium-term price stability. The Authority thus gives up its ability to control domestic interest rates, which are instead largely determined by international lending rates and expectations of future movements in the Singapore dollar.
The decision, which was in line with market expectations, was chiefly driven by expectations of core consumer price deflation and a recession in the country. Core inflation, the key variable tracked by the MAS, is expected by the Authority to average between minus one and zero percent this year owing to low global oil prices, depressed demand, a weaker labor market and government measures to reduce the cost of healthcare and pre-school education. However, the global health crisis has disrupted supply chains, putting upward pressure on imported food prices, and will continue to do so. Meanwhile, the MAS forecasts the economy to enter a recession this year due to the pandemic hitting exports, the tourism sector and domestic activity.
In the press release, the MAS did not explicitly state the likely future direction of monetary policy. That said, the Bank highlighted “the primary role of fiscal policy in mitigating the economic impact of Covid-19”, suggesting the monetary stance may not become as expansionary as in other countries. The Authority added that it “will continue to be vigilant over developments in the economy and financial markets, and stands ready to curb excessive volatility in the S$NEER”. Moreover, the MAS noted it will continue to complement government efforts to contain the fallout from the pandemic by providing sufficient liquidity.
Commenting on the latest meeting and the outlook, analysts at Goldman Sachs stated: “For now, our base case is no further change in MAS policy over the coming year. However, should the depth and duration of the growth downturn be even larger than we currently expect, that could create a risk of further downward adjustments to the mid-point of the SGD NEER policy band.”