SINGAPORE – A widely expected move for the Monetary Authority of Singapore (MAS) to ease Singdollar policy slightly has come to pass, on the back of slower economic growth this year.
It is the first time Singapore’s central bank has eased monetary policy in more than three years, and follows two rounds of tightening in 2018.
On Monday (Oct 14) in its biannual monetary policy review, MAS said it would “reduce slightly” the Singdollar policy band’s rate of appreciation, from a previous “modest and gradual appreciation” path.
There was no change to the width and level at which it is centred.
DBS FX strategist Philip Wee said this means the Singdollar should be rising by 0.5 per cent a year, from 1 per cent previously, against a basket of key currencies.
“The central bank has kept the door for another easing should the already weak growth/inflation outlook deteriorate significantly,” he noted.
HSBC chief Asean economist Joseph Incalcaterra added that the policy statement this month was unique in that MAS provided “relatively clear forward guidance, signaling that the central bank stands ready to act further”.
“Based on our expectation for global growth to continue weakening into next year – driven in large part by a slowing Chinese economy – we believe that MAS will adopt a flat slope in the first half of 2020,” he added.
But he noted that most of the boost to the Singapore economy is likely to come from fiscal policy, via a “highly expansionary” budget next year.
MAS uses the exchange rate as its main monetary policy tool to balance between inflation from overseas and economic growth.
The rate is managed against a trade-weighted basket of currencies of major trade partners, with the Singdollar allowed to float within a band that can be adjusted when policy is reviewed.
A weaker currency, which corresponds to easing in policy, makes imports more expensive in Singdollar terms while boosting demand for tradable goods and services made here.
Noting that the US dollar had weakened against the Singdollar by 0.15 per cent to S$1.37 at 8.25am, Mr Wee said: “I would that attribute that to last Thursday and Friday’s excessive optimism over the partial trade deal, as well as hopes for a Brexit deal.”
He was referring to the partial deal between the United States and China late last week, breaking an 18-month trade spat. This included increasing US farm product purchases, and covered the areas of intellectual property, financial services and currencies as well.
“Reality checks should be feeding in, that a trade deal doesn’t mean the end of the trade war. They have merely suspended the tariffs that were kicking in tomorrow,” added Mr Wee.
Maybank Kim Eng economist Lee Ju Ye said the softer appreciation pace could help exports slightly but “given that the export numbers have been pretty bad over past few months,(it is unclear) whether that could help to fully offset the overall decline in demand”.
“Global demand is slowing, as seen by some of the capital expenditure numbers in different countries,” she said.
She added that the softer appreciation may also help tourism figures. Visitor numbers have been encouraging and it could help related sectors such as accommodation and food and beverage, providing support to the labour market as well.
On Monday, MAS said of its policy decision: “This measured adjustment to the policy stance is consistent with medium-term price stability, given the current economic outlook.”
It expects Singapore’s economic growth to pick up modestly in 2020, but for the level of output to “remain below potential”.
MAS core inflation is likely to remain below its historical average over the next few quarters before rising gradually over the medium term, said the central bank.
Core inflation, which excludes costs of accommodation and private road transport, is expected to come in at the lower end of the 1 per cent to 2 per cent range this year, averaging 0.5 per cent to 1.5 per cent in 2020.
Meanwhile, headline inflation is projected to be around 0.5 per cent this year, averaging 0.5 per cent to 1.5 per cent in 2020.
MAS uses the exchange rate as its main monetary policy tool to balance between inflation from overseas and economic growth.
A weaker currency, which corresponds to an easing in monetary policy, makes imports more expensive in Singdollar terms, while boosting demand for tradable goods and services made here.
MAS said on Monday that global economic growth is expected to slow discernibly in 2019 compared to the previous two years, and should stabilise next year barring further shocks.
Growth eased more significantly in the second quarter as the cumulative effect of trade tariffs and heightened policy uncertainty took a heavier toll on manufacturing and trade.
“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,” the MAS added in a statement.
“Against this global backdrop, the weakness in electronics production and its supporting industries in Singapore is likely to persist over the near term,” it said.
Singapore, like many other export-reliant economies in Asia, has taken a hit from slowing global demand and an escalating trade war.
MAS’ latest move follows that of other central banks around the world, which have been loosening policy to guard against the global slowdown and fallout from the trade war.
Analysts have been anticipating the move at the biannual review, with 11 economists polled by Reuters expecting MAS to ease policy.
Mr Wee said the concern now is whether the tariff war will widen to impeding investment flows between the US and China, and whether the truce will see US President Donald Trump’s administration turning the tariff war towards the Euro zone.
Flash estimates from the Ministry of Trade and Industry out on Monday as well showed that Singapore .
The economy expanded 0.6 per cent on a quarterly basis, marking a turnaround from the 2.7 per cent contraction previously.
Overall, growth was 0.1 per cent, the same pace as in the second quarter.