Singapore: MAS makes changes to the policy band in April
April 14, 2016
At its first scheduled semi-annual meeting of 2016, which took place on 14 April, the Monetary Authority of Singapore (MAS) decided to set the rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at zero percent. .” The Bank emphasized that April’s decision is, “not a policy to depreciate the domestic currency.” In all of the previous meetings since April 2010, the MAS had maintained a monetary policy stance of a “modest and gradual appreciation”, although the slope of appreciation was lowered at its January and October 2015 meetings. Despite April’s shift in policy, the width of the policy band and level at which it is centered were left unchanged. While the likelihood of MAS’ move was debated by analysts, an easing of the monetary policy stance had not been expected. Regarding the decision, economists at Standard Chartered commented:
“The market consensus (and our) expectation was no change to policy settings. We had previously estimated the SGD NEER policy band slope at +0.5% per annum, with the width at +/-2% on either side of the policy band. […] With the slope now flat, and given that the SGD NEER policy band had never been set at a negative slope before, any additional easing may now involve re-centering and/or band widening.”
The Central Bank’s decision came on the back of weaker growth prospects and subdued price pressures in Singapore’s economy. Subdued external demand, amid weak growth in Singapore’s major trading partners, is expected to weigh on export revenues this year. The MAS expects GDP growth in 2016 to be between 1.0% and 3.0%. The Central Bank stated that, besides a cutback in oil exploration activities, “the weakness in IT production and its supporting industries will also persist due to tepid final demand and ongoing corporate restructuring. In comparison, the domestic-oriented sectors should continue to provide some support to the economy, underpinned by sustained demand for healthcare and education services, as well as public infrastructure spending.”
Regarding price developments, the Bank noted that, “external sources of inflation will stay benign given ample supply buffers in the commodity markets and weak global demand conditions.” The MAS forecasts core inflation for the whole of 2016 to stay within the lower half of the 0.5%–1.5% forecast range as it will be constrained by slowing wage growth and moderating domestic cost pressures. The Bank concluded that, “the cumulative effects of past S$NEER movements and the new policy path will continue to ensure price stability over the medium term. The next meeting is scheduled for mid-October 2016.