UPDATE: Monetary Authority of Singapore eases policy less than some analysts expected

A Singapore 10-dollar note Photo by Leslie Shaffer

This article was originally published on Monday, 14 October 2019 at 9:57 A.M. SGT; it has since been updated to include comments from Capital Economics.

The Monetary Authority of Singapore has reduced the rate of appreciation of the Singapore dollar slightly on Monday, taking a more prudent approach to easing policy than some analysts had expected amid slowing economic growth globally.

“This measured adjustment to the policy stance is consistent with medium-term price stability, given the current economic outlook,” the statement said. “MAS will continue to closely monitor economic developments and is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly.”

Instead of interest rates, the MAS uses the Singapore dollar exchange rate to set policy. That’s due to the island nation’s open economy and small size. Monetary policy is set by adjusting the Singapore dollar’s trading band, which is based on an undisclosed basket of currencies weighted to trade levels with the country.

The central bank said it wouldn’t change the width or central level of its policy band — the Singapore dollar NEER, or nominal effective exchange rate.

“The policy guidance came below market expectation, with most analysts previously expecting the central bank to flatten the S$NEER curve or even make it downward sloping. A mild monetary easing is probably insufficient to boost manufacturing and exports in the short term,” Margaret Yang Yan, a market analyst at CMC, said in an emailed statement Monday.

The Singapore dollar strengthened against the U.S. dollar in Monday trade, with the greenback fetching as little as S$1.3694, from as much as S$1.3730 before the announcement, according to Bloomberg data. At 9:48 A.M. SGT, the dollar/Sing was at 1.3705.

Yang pointed to the Singapore dollar’s move higher as a sign the market was unwinding its expectations for a bigger move on policy. Typically, currencies weaken when central bank’s ease policy.

Capital Economics estimated the target rate of appreciation had been lowered to between 0.5 percent to 1 percent, down from the economic research firm’s previous estimate of 1.25 percent to 1.75 percent.

“We estimate that the currency still has plenty of space to weaken within the band,” Alex Holmes, Asia economics at Capital Economics, said in a note Monday.

The central bank said Singapore’s economic growth has slowed over the course of 2019, and although a modest pick up was expected next year, that outlook was “subject to considerable uncertainty in the external environment.”

In the third quarter, the city-state’s economic growth kept its nose in positive territory, eking out a 0.1 percent on-year expansion, steady with the second quarter’s gross domestic product (GDP), advance data from the city-state’s Ministry of Trade and Industry showed Monday.

The MAS projected Singapore’s GDP growth would come in around the mid-point of the 0 percent to 1 percent forecast range this year.

“Growth had eased more significantly in the second quarter of 2019 as the cumulative effect of the tariffs and elevated policy uncertainty took a heavier toll on manufacturing and trade,” the MAS statement said. “There are nascent signs that the downturn could spill over into domestic demand in some of Singapore’s major trading partners in the quarters ahead, even as macroeconomic policy conditions in these economies have turned more accommodative.”

Capital Economics’ Holmes said he expected the city-state’s economy would remain weak ahead, and pointed the the U.S.-China trade war.

“The question now is whether the MAS will loosen policy further at its next meeting in April 2020,” Holmes said. “While we expect both growth and core inflation to remain subdued, we don’t expect the prospects for either to deteriorate significantly. On balance, the MAS will probably leave settings unchanged. But any reversing of today’s policy loosening is very unlikely – we expect monetary policy to remain accommodative throughout next year.”

The MAS has official policy-setting meetings only twice a year, in October and April, although on rare occasions, it has taken action between meetings. 

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