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Singapore Monetary Policy October 2019

Singapore: MAS eases monetary policy at its second semi-annual meeting in October

On 14 October, the Monetary Authority of Singapore (MAS) slightly reduced the undisclosed rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, although left the width of the policy band and the level at which it is centered unchanged. The Singapore dollar is managed against a basket of currencies and the MAS operates a managed float regime, which fluctuates 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 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 driven by muted inflationary pressures and softening economic momentum. Consumer price inflation remained weak in the year to date due to falling prices for electricity and gas following the liberalization of the retail electricity market. Meanwhile, the MAS core inflation measure—which excludes accommodation and private road transport costs—has also been subdued. Moreover, the Authority expects inflationary pressures and economic growth to remain soft through next year: The MAS lowered its inflation expectation for this year to around 0.5%, down from 0.5%–1.5%, while it expects inflation to remain broadly stable in 2020. Meanwhile, the Singaporean economy is suffering from the global tech slump and trade war weighing on manufacturing activity; although the domestic economy has remained resilient so far, external headwinds could spill over into the domestic economies of key trading partners and thereby dent exports, further dragging on Singapore’s economy.

In its accompanying press release, the MAS turned more dovish. While the Authority continued to state that it considers its current stance to be in line with medium-term price stability given the current economic outlook, it added that it is “prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly”. Commenting on this addition to the forward guidance, the research team at Nomura stated that: “it is unclear whether ‘significantly’ means a further slowing of growth or a recession but regardless, MAS was explicit about potentially easing FX policy ahead.”

Meanwhile, taking stock of the latest developments, analysts at Goldman Sachs commented that, “for now, our base case is no change in policy over the coming year, although (…) we see a significant possibility of a further flattening of the slope of the MAS policy band”. That sentiment was largely echoed by Robert Carnell, chief Asia-Pacific economist at ING, who noted that while “there is the possibility for a further easing of the policy stance at the April 2020 meeting […] the most likely assumption now would be that the stance remains unchanged, given that the economy may not be worsening particularly.”

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