SINGAPORE: The Monetary Authority of Singapore (MAS) on Friday (Apr 12) kept its exchange rate-based monetary policy unchanged after tightening twice last year, in line with market expectations.
In a statement for its semi-annual policy review, the central bank said it will maintain the current rate of appreciation of the Singapore dollar's nominal effective exchange rate (S$NEER) policy band.
It will also leave the width and the level at which the band is centred unchanged.
“This policy stance is consistent with a modest and gradual appreciation path of the S$NEER policy band that will ensure medium-term price stability,” said the MAS.
MAS operates a managed float regime for the Singapore dollar, allowing the exchange rate to fluctuate within an unspecified policy band, rather than to a fixed value.
It changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the Singapore currency.
Last April, the central bank made its first tightening move in six years by slightly increasing the slope of the policy band from zero per cent to allow for “a modest and gradual” appreciation.
When it met again in October, the MAS tightened a second time. But amid external headwinds and dimming domestic conditions, economists had said that a third tightening move would not be a charm.
Advance estimates out on Friday morning showed Singapore's economy slowed to year-on-year growth of 1.3 per cent for the first quarter amid a contraction in the key manufacturing sector.
MAS, in its policy review, noted that manufacturing’s contribution to GDP growth has waned over the last six months, reflecting the maturing of the global electronics cycle and a slowdown in China’s economy.
Despite the services sectors holding up and a recovery in the construction sector, the Singapore economy has slowed overall and “is likely to expand at a modest pace in the coming quarters”, it added.
Core inflation has also come in lower than projected due to weaker global oil prices and a stronger impact from the liberalisation of the retail electricity market. The measure closely watched by central bankers eased to a nine-month low of 1.5 per cent in February.
As such, MAS said it is downgrading its 2019 forecast range for core inflation to 1 to 2 per cent, from the previous prediction of between 1.5 and 2.5 per cent.
Globally, the central bank expects “significant uncertainty” remaining in the short term, as growth momentum of the global economy slowed more than expected at the turn of the year alongside sluggish trade.
However, policy stances in China and the United States have become more accommodative, it noted, while adding that global financial conditions have eased.
In explaining its latest monetary policy decision, MAS concluded: “GDP growth in the Singapore economy has eased, bringing the level of output closer to its underlying potential. Despite some pickup in labour costs, inflationary pressures are mild and should remain contained.”
Given the downgrade in expectations for core inflation, Friday’s policy statement hints at an increasingly cautious MAS, said Standard Chartered Bank’s chief economist for ASEAN and South Asia Edward Lee.
“Core inflation has surprised to the downside versus consensus four out of six times since their last meeting due to some of the developments they noted, such as the Open Electricity Market,” he told reporters. “They’ve turned more cautious and rightly so.”
Still, Mr Lee reckons that the central bank’s cautious stance does not necessarily allude to a shift towards more dovish action.
“While they have turned more cautious, they are keeping some of the optionality open to move again in October, if the significant uncertainty over the growth outlook doesn’t materialise.
“Is the next step easing? From this statement, I don’t think so. Is the next step a pause (in tightening)? A higher probability than easing. Is the next step a tightening? Probably more likely than easing as well,” he said.
Mizuho's head of economics and strategy Vishnu Varathan echoed that.
While the latest policy statement contains “dovish hues” – such as the mention of “significant uncertainty” in the near term for the global economy – the MAS “did not do a three-point turn to capitulate on prior policy normalisation”, he said.
Neither has the central bank “changed its guidance to one of imminent easing”, noted Mr Varathan.
The allusion to more accommodative policy in China and the US, alongside easier global financial conditions, also point to the prospects of stabilisation, he added.
Holding a contrarian view is research firm Capital Economics, whose economist Alex Holmes is expecting MAS to loosen policy by October.
This is largely due to weak exports crimping the outlook of the Singapore economy this year.
“We are forecasting growth of just 1.5 per cent in Singapore this year. This is right at the bottom of the (Government’s) forecast range of 1.5 to 3.5 per cent,” he wrote in a note.
Inflation could also soften more than official estimates, with core inflation dropping below 1 per cent by the middle of the year on the back of slower economic growth, further drops in electricity prices and lower oil prices.
“The upshot is that if GDP growth and core inflation weaken as we expect, MAS is likely to loosen policy at its next meeting in October, probably by adopting a flat slope for its policy band,” said Mr Holmes.