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MAS eases monetary policy as economy reels from impact of COVID-19

MAS eases monetary policy as economy reels from impact of COVID-19

File photo of the Monetary Authority of Singapore building on Shenton Way. (File photo: CNA/Jeremy Long)

SINGAPORE: Singapore's central bank eased monetary policy as expected on Monday (Mar 30), as the economy reels from the impact of a novel coronavirus pandemic.

In its half-yearly monetary policy statement, the Monetary Authority of Singapore (MAS) said with the deterioration in macroeconomic conditions and expectations of a weaker outlook, the Singapore dollar nominal effective exchange rate (S$NEER) policy band has “depreciated to a level slightly below the mid-point of the policy band”.

“MAS will adopt a zero per cent per annum rate of appreciation of the policy band starting at the prevailing level of the S$NEER,” it added.

There will be no change to the width of the policy band.

“This policy decision hence affirms the present level of the S$NEER, as well as the width and zero per cent appreciation slope of the policy band going forward, thus providing stability to the trade-weighted exchange rate," it said.

This is in line with a Bloomberg poll, where all 11 economists surveyed expected the MAS to reduce the slope of its currency band to zero and re-center the band downwards.

Monday's two-in-one policy decision marks the second consecutive easing move by MAS after it reduced the pace of the Singapore dollar’s appreciation “slightly” in October last year.

The last time MAS flattened the S$NEER slope to zero per cent or adopted a neutral policy stance was in April 2016. It held on to that neutral stance for two years before tightening twice in 2018 to allow for “a modest and gradual” appreciation.

Meanwhile, the last time the central bank lowered the band’s center was during the global financial crisis in 2009.

Unlike most central banks that manages monetary policy through the interest rate, the MAS uses the exchange rate as its main policy tool.

This refers to the S$NEER – the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies from Singapore’s major trading partners.

The S$NEER is allowed to float within an unspecified band. Should it go out of this band, the MAS steps in by buying or selling Singapore dollars.

READ: The S$NEER and its slope, width and centre: Questions about Singapore’s monetary policy

The central bank also changes the slope, width and mid-point of this band when it wants to adjust the pace of appreciation or depreciation of the local currency based on assessed risks to Singapore’s growth and inflation.

It typically announces these changes at two scheduled policy meetings in April and October.


Monday’s policy decision comes earlier than usual amid worsening economic conditions this month as the COVID-19 outbreak continues around the world.

Preliminary growth figures released last week showed the economy shrinking a worse-than-expected 2.2 per cent year-on-year in the first quarter.

Policymakers have also downgraded the official growth forecast for 2020 to between -4 per cent and -1 per cent, a worse outlook from an earlier predicted range of -0.5 per cent to 1.5 per cent.

READ: Singapore's economy contracts by 2.2% in Q1 as COVID-19 outbreak hits construction, services sectors

Meanwhile, core inflation – a central bank metric that excludes private transport and accommodation costs – fell 0.1 per cent from a year earlier in January, dipping into negative territory for the first time in more than a decade.

In its statement, it said the COVID-19 pandemic has led to a severe contraction in economic activity in Singapore and globally, due to the combination of supply chain disruptions, travel restrictions imposed in many countries and a sudden decline in demand.

“The ongoing wave of COVID-19 outbreaks will continue to dampen global growth beyond the first half of the year, even as China is showing signs of recovery to normalcy.

“Fiscal, monetary and regulatory support in a number of major economies will help to mitigate the economic fallout, but is unlikely to change this weak outlook,” it added, noting that a recovery in the global economy will depend on the epidemiological course of the pandemic and efficacy of policy responses.

Looking ahead, MAS expects global economic growth to stall or even contract in the first half of 2020, with “significant interruption” to economic activity in most of Singapore’s major trading partners.

READ: Singapore’s 'bazooka' stimulus to cushion COVID-19 pain, but recession still on the cards: Economists

It reaffirmed official forecasts for the Singapore economy to enter a recession this year, noting that activity will remain subdued in the travel-related and consumer-facing sectors until the pandemic is contained globally and in the region.

Growth in the trade-related industries will be weighed down by the decline in external demand and supply chain disruptions. The general slowdown in business activity and investment is also expected to affect modern services, such as finance and insurance and information and communications.

MAS on Monday also lowered its core inflation and headline inflation forecasts to between -1 per cent and 0 per cent, noting that “disinflationary pressures are expected to broaden” even as the prices of some imported items will likely pick up on the back of production and transport disruptions.

To prop up the economy, a record S$48 billion stimulus package was announced in a supplementary Budget last week. Together with the S$6.4 billion announced in Budget 2020, Singapore will earmark close to S$55 billion, or about 11 per cent of its gross domestic product (GDP), for its fight against COVID-19.

MAS said: “The Resilience Budget announced on Mar 26, and the earlier Unity Budget, will help to preserve jobs, skills and firms’ know-how and capabilities.

“MAS’ money market operations will at the same time provide sufficient liquidity to the financial system. Monetary policy will complement these efforts and ensure price stability over the medium term,” added the central bank’s statement. 

“MAS will continue to be vigilant over developments in the economy and financial markets, and stands ready to curb excessive volatility in the S$NEER."


Mr Alex Holmes from research firm Capital Economics described the central bank's latest decision as a "complement" to fiscal policy, which will remain the key form of support for the economy.

He added that there could be a limit in terms of what more the MAS could do further down the road.

"The question now is whether the MAS will loosen policy further in the coming months. With global growth collapsing, a much weaker currency probably wouldn’t make much difference to export prospects," Mr Holmes wrote in a note.

"And while further currency weakness would put more upward pressure on import price, there would be little hope of boosting core inflation towards the MAS soft target of 2 per cent."

Several other economists have also said they expect the central bank's monetary policy to remain on hold throughout 2020.

A note from Fitch Solutions Country Risk and Industry Research explained that this is because further easing will risk amplifying any spikes in import prices of essentials including food and medical supplies, as well as sparking off another sell-off in the Sing dollar.

"Given that the central bank said the move was to affirm the S$NEER at current levels, we believe that it does not want to see a further large slide in the value of the Sing dollar," it said.

The Singapore dollar was last seen trading at 1.4286 against the US dollar at 9.07am, after briefly strengthening slightly to 1.4217 following MAS' announcement.

Source: CNA/sk


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