SINGAPORE (Oct 14): The Monetary Authority of Singapore (MAS) has eased the monetary policy “slightly” – the first easing in over three years – amid slowing economic growth.
In its latest half-yearly monetary policy review on Monday, MAS said it is reducing the rate of the Singapore dollar’s appreciation.
The slope of the Singapore dollar nominal effective exchange rate (S$NEER) will be reduced, but the width of the policy band and the level at which it is centered remain unchanged.
The S$NEER is the trade-weighted basket of currencies against the Singapore dollar, which has been a key policy tool for MAS.
The MAS noted that the slight easing is “consistent with medium-term price stability, [amid] the current economic outlook”.
However, the central bank added that it “will continue to closely monitor economic developments and is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly”.
This slight downward easing follows two consecutive appreciations to the Singdollar in April and October 2018. The policy held steady in this year’s April review, with the band following the directive issued last October.
The recent easing is in line with economists’ and market watcher’s expectations, and follows Singapore’s near nil economic growth of 0.1% y-o-y for 3Q2019, similar to the preceding quarter.
See: Singapore expected to dodge technical recession in 3Q even as economy stalls
Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation (SMBC), believes Singapore is susceptible to global headwinds due to its economic structure.
“At the moment, risk-on sentiment has returned to the fore, thanks to positive headlines on the US-China trade negotiations. However, unless both parties reach an agreement and previously imposed tariff hikes are removed, negative impact on the actual economy still remains,” Abe says.
“Although a technical recession was averted, pace of economic expansion was extremely slow,” he adds.
On a q-o-q seasonally-adjusted annualised basis, growth for 3Q19 was 0.6%, a turnaround from the 2.7% contraction in 2Q19.
This means a close shave from a technical recession, which is defined as two consecutive quarters of negative growth.
The estimates released by Trade and Industry Ministry on Monday are in line with official estimates released in August of full-year GDP growth coming in between 0 – 1%, down from the previous range of 1.5 – 2.5%.
However, the latest easing of the S$NEER is expected to enhance the price competitiveness of Singapore’s exports and make the city state’s currency more competitive.
The central bank expects GDP growth to pick up modestly in 2020, even though “the level of output will remain below potential”.
Consequently, MAS says “inflationary pressures should be muted”, adding that its core inflation should remain below its historical average over the next few quarters before rising gradually over the medium term.
“Core inflation came in lower than anticipated in recent months” the central bank noted, adding that this was brought on by falling costs of electricity and gas, as well as the dissipation of the effect of the previous hike in water prices.
MAS forecasts that this will remain “subdued” in the year ahead.
Going forward, SMBC expects economic growth in the US and China to slow down gradually. “Meanwhile, monetary easing by central banks and fiscal stimulus measures by the governments will likely help emerging Asian countries regain their economic growth momentum going forward,” Abe says.
“Considering that the outlook for the external environment is not entirely pessimistic, Singapore’s economy is expected to bottom out this year, and recover gradually from the first quarter next year. Further monetary easing is expected if the economic recovery lacks momentum at the time of the next policy meeting in April 2020,” he adds.
