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Singapore Monetary Policy April 2021

Singapore: MAS holds monetary policy steady in April

At its 14 April meeting, the Monetary Authority of Singapore (MAS) left its monetary policy unchanged at the level implemented at the outset of the Covid-19 pandemic in March 2020. 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 for the second meeting running. 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 weak outlook for consumer prices. The Authority expects core inflation—the key variable that it tracks—to clock between 0.0% and 1.0% this year as a lingering negative output gap and a slack labor market weigh on price pressures. Nevertheless, the MAS forecasts economic growth to exceed the upper bound of the previously expected 4.0–6.0% range, as the vaccine-driven upturn in foreign demand boosts the external sector. As such, the Authority saw it appropriate to continue 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”.

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

“Going forward, with still significant economy-wide slack keeping core inflation within MAS’s comfort zones, we do not expect MAS to make any changes to the SGD NEER policy band parameters (the slope, mid-point or width) this year. However, normalizing activity in consumer facing sectors, strong external demand, and a closing output gap could prompt higher core inflation pressures next year, creating enough momentum for some policy tightening in April 2022.”

This is something Irvin Seah, senior economist at DBS Bank, broadly agrees with, although he notes with caution:

“The October policy decision will be trickier. The MAS could choose to take a pre-emptive approach (i.e., if inflation is a concern) or adopt a slightly passive stance and for the decision to be reaffirmed by potentially strong data. Simply put, October’s decision will be data dependent. It will depend on the dynamics between growth and inflation, and overlay with the risk ahead, not just domestically but also externally. On the flip side of the increasingly encouraging macro data, new variants of the virus, a resurgence of the pandemic and the slow rollout of vaccines in some countries (including regional peers) are complicating the policy equation. Inflation is just one of the variables in this equation.”

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

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