There will be no change to the Singapore dollar’s current pace of appreciation amid an easing in the Republic’s economic growth, although the forecast range for core inflation has been lowered.
After twice allowing the Singdollar to rise at a slightly faster pace, the Monetary Authority of Singapore (MAS) said in its half-yearly review yesterday that it will maintain the rate of appreciation, with the width of the policy band and the level at which it is centred also staying unchanged.
The decision to stand pat on monetary policy was expected by economists, given the United States Federal Reserve signalling no interest rate hikes this year and both domestic growth and core inflation easing.
It came as official advance estimates released yesterday showed Singapore’s economic growth slowed to 1.3 per cent in the first quarter, below analysts’ expectations of 1.4 per cent expansion compared with the same period a year ago.
MAS uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth. The rate is allowed to float within a band that can be adjusted when monetary policy is reviewed.
A stronger currency – which corresponds to tighter monetary policy – counters inflationary pressures by making imports cheaper in Singdollar terms and cooling demand for tradable goods and services produced here.
A weaker currency makes imports more expensive in Singdollar terms, while boosting demand for tradable goods and services made here.
The current policy stance is consistent with “a modest and gradual appreciation path of the S$Neer (Singapore dollar nominal effective exchange rate) policy band that will ensure medium-term price stability”, said the central bank.
It said “the Singapore economy has slowed, and is likely to expand at a modest pace in the coming quarters”.
Core inflation – which excludes the cost of accommodation and private road transport – came in lower than projected as well owing to weaker global oil prices and a stronger impact from the liberalisation of the retail electricity market.
As a result, it downgraded its 2019 forecast range for core inflation to 1 per cent to 2 per cent, down from between 1.5 per cent and 2.5 per cent previously. The figure is expected to come in near the mid-point of the revised range.
HSBC Asean chief economist Joseph Incalcaterra and senior Asia FX strategist Joey Chew said the downward revision to the core inflation forecast was an unexpectedly strong dovish signal.
It suggests that MAS does not expect to tighten policy any further this year, they added.
Ms Selena Ling, OCBC Bank’s head of treasury research and strategy, also believes there will be no change in monetary policy come October. But a US-China trade deal and pick-up in global economy could change things.
“Like the Fed, MAS is likely to be in data-dependent mode but not unduly bearish,” she said.