Singapore: MAS leaves policy band unchanged at October meeting
October 14, 2016
At its second scheduled semi-annual meeting of 2016, which took place on 14 October, the Monetary Authority of Singapore (MAS) decided to leave the rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band unchanged at zero percent. The MAS also left both the width of the policy band and the level at which it is centered unchanged. The Bank emphasized that October’s decision was adopted on the rationale that “a neutral policy stance will be needed for an extended period to ensure medium-term price stability.” At its April meeting the Bank decided to set the rate of appreciation of the S$NEER policy band at zero, shifting away from its previous policy of gradual appreciation to introduce a more accommodative policy. Analysts broadly expected the Bank’s resolution.
The Central Bank’s decision came on the back of recently released data on economic growth in Q3, which showed that GDP contracted 4.1% on a quarter-on-quarter seasonally annualized basis. Subdued external demand weighed heavily on the manufacturing sector, which contracted dramatically. The MAS expects GDP growth in 2016 to come in at the lower end of the 1–2% forecast range. The Central Bank stated that, “against this external backdrop, Singapore’s trade-related sectors will continue to pose a drag on GDP growth in the quarters ahead […]. In comparison, modern services, such as information & communications, and selected domestic-oriented sectors should continue to provide support to the economy, underpinned by government spending and robust demand for healthcare and education services.”
Regarding price developments, the Bank noted that, “domestically, overall cost pressures should be muted, in line with emerging slack in the economy [and] on the external front, imported inflation is likely to rise mildly given ample supply buffers in the commodity markets and soft global demand conditions.” The MAS forecasts that consumer prices will fall around 0.5% throughout 2016, constrained by slowing wage growth and the subdued economic environment. For 2017, the Bank forecasts inflation of between 0.5% and 1.5%. The Bank concluded that, “the current policy band provides some flexibility for the S$NEER to accommodate the near-term weakness in inflation and growth.” The next meeting is scheduled for mid-April 2017.