SINGAPORE (Mar 30): The Monetary Authority of Singapore (MAS) has eased monetary policy – in line with expectations – as Singapore’s economy weighs down from the impact of the Covid-19 pandemic.
In its latest half-yearly monetary policy review on Monday, the MAS said it is reducing the rate of the Singapore dollar’s appreciation to zero, at the prevailing level of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER).
The move is effectively a re-centering of the mid-point of the policy band to a lower level while keeping the width of the policy band unchanged.
“The policy decision hence affirms the present level of the S$NEER, as well as the width and 0% appreciation slope of the policy band going forward, thus providing stability to the trade-weighted exchange rate,” notes MAS.
The S$NEER is the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies of Singapore’s key trading partners. It serves as the city-state’s main exchange rate policy, unlike the control of interest rates by other central banks.
The S$NEER is allowed to float within an unspecified band. The MAS steps in to buy or sell Sing dollars, if the S$NEER floats out of this band.
The central bank also changes the slope, width and mid-point of this band by adjusting the rate of appreciation or depreciation of the Singapore Dollar according to the republic’s growth and inflation levels.
The MAS’ latest move is its second consecutive easing, after it reduced the pace of the Singapore dollar’s appreciation “slightly” last October. Meanwhile, it is the first time since the 2009 global financial crisis that the central bank has lowered the center of the S$NEER policy band.
See : MAS eases monetary policy 'slightly' for the first time in 3 years
To be sure, Monday’s move comes earlier than the typical April announcement, amid expectations that Singapore's economy will contract and possibly head into a recession as the Covid-19 pandemic escalates and shreds key sectors both in domestically and abroad.
To this end, the Singapore dollar – and the benchmark Straits Times Index (STI) for stocks – have been highly volatile in the past few weeks. The currency hit a low of 1.465 against the US dollar on March 23, before recovering to around 1.43, five days later on Mar 27.
Flash estimates released by the Ministry of Trade and Industry (MTI) on Mar 26 shows that Singapore’s economy shrank 2.2% in the first quarter, worse than the median forecast of a 1.4% decline registered in a Bloomberg survey of economists.
The MTI has consequently downgraded its official full-year growth forecast to between -4% and -1%, just a month after the -0.5% to 1.5% target range it predicted previously.
This follows a fall in Singapore’s consumer price index (CPI) to -0.5% in February 2020 - the first time the index has fallen into negative terrain since January 2009.
For now, the economy is expected to get some relief from the $48.4 billion Resilience Budget unveiled by Deputy Prime Minister Heng Swee Keat on Mar 26. This is in addition to the $6.4 billion stimulus Budget announced in February and brings total relief to $55 billion or 11% of GDP.
See: Government goes all out in fight against Covid-19, sets aside additional $48 bil in supplementary relief package
Even so the MAS expects Singapore’s economy to contract this year.
“GDP growth will eventually recover following the abrupt downshift in the level of activity, but there is significant uncertainty over the depth and duration of this recession. MAS Core Inflation is likely to remain below its historical average in the near and medium term,” says MAS.
