The Singapore dollar is expected to end the year at 1.35 or 1.36 against the US dollar, before strengthening to 1.31 or 1.32 by end 2021, market watchers say.
This is despite Monetary Authority of Singapore (MAS), the republic’s central bank, warning of a weak underlying growth momentum as well as expectations of core inflation to stay low.
Core inflation, which gauges price increments in sectors other than accommodation and private transport, is expected to range between –0.5% and 0% this year, before rebounding to between 0% and 1% in 2021. Core inflation is one of the gauges MAS considers when making its monetary policy decision.
Similarly, “headline inflation” or all-items inflation, which measures the total level of inflation in the economy, is tipped to fall between –0.5% and 0% this year. For 2021, a wider range of between –0.5% and 0.5% is seen.
In line with expectations of economists, MAS has kept its monetary policy stance on “neutral” when it announced its half-yearly review on Oct 14. This neutral position comes after two consecutive rounds of easing. The first was announced in its Oct 2019 review while the second was announced on March 30.
A neutral stance means MAS has made no change to the width of the band in which the Singapore dollar nominal effective exchange rate (S$NEER) is allowed to float.
Meanwhile, the slope of the band, which indicates its rate of appreciation, and the midpoint have been left untouched. With this, MAS is maintaining a 0% per annum rate of appreciation of the policy band.
MAS says its latest stance will “complement fiscal policy efforts to mitigate the economic impact of Covid-19 and ensure price stability over the medium term”. The latest decision comes as Singapore’s economy shrank by 7% year-on-year in 3Q2020 ended September, according to advance estimates from the Ministry of Trade and Industry (MTI). The government expects full-year growth to plunge between 5% and 7% this year, but to then record “above trend growth” in 2021 due to the low base in 2020.
See: 3Q likely start of recovery for Singapore's economy
“The negative output gap will narrow as most sectors recoup their pre-Covid levels by the end of next year. However, activity in travel-related services will still be short of pre-pandemic levels,” MAS observes.
Recalling the policy stance of MAS during the previous economic downturns like the one in 2016, Standard Chartered’s Global Research team notes the central bank’s recent guidance has been “more flexible” than during its last stretch of neutral basis in 2016. This could be because “the pandemic-related economic pressure is different from previous recessions which were triggered by prolonged demand/supply imbalances”, the team explains.
Other economists like Ong Sin Beng of JPMorgan expect MAS to maintain this neutral stance into “the foreseeable future”, which is likely to last “through year-end 2021”. Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye agree, citing “the sluggish [economic] recovery and muted inflation risks” as key factors determining MAS’s move.
Vishnu Varathan, who heads the economics and strategy team at Mizhou bank, goes a step further. He does not expect a policy normalisation till 2022. “Whether this [normalisation] is in April or October will depend on the path of the recovery, meaning how uninterrupted and strong [it is]”.
