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Singapore Monetary Policy October 2020

Singapore: MAS holds monetary policy steady at October meeting

The Monetary Authority of Singapore (MAS) left its monetary policy unchanged at the level set in its previous meeting on 30 March. As such, the MAS kept the target rate of annual appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at zero percent, effectively maintaining its loose monetary stance. Furthermore, there was no change to the width of the policy band. 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 are decided by the Authority in order 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 widely expected by market analysts, was driven by a cautious growth outlook for the rest of 2020, and continued deflationary expectations. The Authority expects core inflation—the key variable that it tracks—to clock between minus 0.5% and 0.0% this year as subdued demand, low oil prices and a weakened labor market weigh on price pressures. Furthermore, the MAS forecasts a slowdown in growth in Q4 following the 7.9% quarterly expansion recorded in Q3, as the prolonged nature of the viral outbreak acts as a headwind to activity, both domestically and abroad. As such, the Authority saw it fit to prolong its accommodative stance.

In its communiqué, the Authority did not explicitly indicate future policy direction, but commented that “as core inflation is expected to stay low, MAS assesses that an accommodative policy stance will remain appropriate for some time”. As such, the MAS’s decision aims to “complement fiscal policy efforts to mitigate the economic impact of COVID-19 and ensure price stability over the medium term”.

Looking ahead, analysts at Nomura see the MAS’s policy staying unchanged throughout 2021, commenting:

“We believe it is too early to position for MAS tightening through S$NEER, as we don’t see this as a material risk until we move closer to 2022. Not only is S$NEER currently expensive at around 0.9% above the mid-point of the +/-2% policy band, but MAS statements highlight some caution.”

This is something analysts at Goldman Sachs broadly agree with, although they note with caution:

“Going forward, our base case is no further change in MAS policy in the second half of the [fiscal] year, as fiscal policy has and will continue to play the primary role of cushioning the impact of the coronavirus on private sector demand and financial balances. […] However, given uncertainty around the virus path, vaccine developments and global growth, should the depth and duration of the downturn be larger than we currently expect, that could create risks of further downward adjustments to the mid-point of the policy band over the coming year.”

The MAS conducts semiannual meetings, with the next monetary policy statement due in April 2021.

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