Singapore: MAS lowers S$NEER policy slope at an unscheduled meeting
January 28, 2015
At the unscheduled monetary policy meeting held on 28 January, the Monetary Authority of Singapore (MAS) decided to reduce the slope of the modest and gradual appreciation path of the Singapore dollar nominal effective exchange rate (S$NEER). The width and the level at which the policy band is centered were left unchanged. The decision to reduce the slope of the appreciation path is the first change the MAS has introduced since April 2012. From that date until the meeting held in October of last year, the Bank has kept the slope, width and level of the S$NEER policy band unchanged. Although some easing was expected by the markets, the unscheduled meeting caught most analysts by surprise as it was far ahead of the regular April review.
In its accompanying statement, the Central Bank pointed out that it expects the global economy to continue to grow at an uneven pace across countries. The U.S. economy is expected to continue its solid recovery. However, growth in the Euro area, China and Japan is likely to remain subdued. On the domestic front, Singapore’s economic activity slowed down markedly in the last quarter of 2014, mainly due to weaker exports. According to advanced GDP estimates released by the statistical office on 2 January, the economy expanded 1.6% in Q4 over the previous quarter at a seasonally adjusted annualized rate (SAAR), which was well below the 3.1% quarterly growth recorded in Q3. The Central Bank expects the economy to grow between 2% and 4% in 2015.
Regarding price developments, annual core inflation, which excludes private road transport and accommodation costs, declined notably in the last quarter of 2014 mainly due to the recent increase in medical subsidies, which led to a one-off reduction in the prices of healthcare. The CPI-All Items declined 0.2% in December, on the back of lower prices for energy and healthcare. Against this backdrop, the MAS revised downward its inflation forecasts for 2015 from the 0.5%-1.5% projected in October to a range of between minus 0.5% and plus 0.5%.
Considering that Singapore’s economy has slowed down markedly and annual core inflation declined significantly during recent months, the Central bank decided to reduce the S$NEER policy slope in an attempt to boost economic growth and counteract deflation pressures. The Central Bank also pointed out that, “MAS will continue to be vigilant over developments in the external environment and their impact on the domestic economy, and stands ready to curb sharp movements in the S$NEER.”
Author: Cecilia Simkievich, Economist