MAS to stop Singapore dollar from rising in surprise easing of monetary policy

MAS to stop Singapore dollar from rising in surprise easing of monetary policy

The move comes as a surprise as most analysts had expected the central bank to maintain its policy of allowing a modest, gradual appreciation of the Singapore dollar.

A view of the Monetary Authority of Singapore
The Monetary Authority of Singapore (MAS) building. (Photo: AFP/Roslan Rahman)

SINGAPORE: The Monetary Authority of Singapore (MAS) said on Thursday (Apr 14) that it will ease its monetary policy by not allowing the Singapore dollar to appreciate.

The move came as a surprise as most analysts had expected the central bank to maintain its policy of allowing a "modest, gradual appreciation" of the Singapore dollar.

"This is not a policy to depreciate the domestic currency, and only removes the modest and gradual appreciation path of the Singapore dollar nominal effective exchange rate (S$NEER) policy band that was in place," MAS said in its half-yearly Monetary Policy Statement.

“The width of the policy band and the level at which it is centred will be unchanged,” it added.

The central bank's announcement sent the Singapore dollar tumbling 0.9 per cent to S$1.3626 against the US dollar as of 8.35am, the biggest fall since November.

MAS manages monetary policy by letting the Singapore dollar rise or fall against an undisclosed basket of currencies of its main trading partners.

Singapore's economy expanded by 1.8 per cent in the first quarter of this year, but growth was flat on a quarter-on-quarter basis in contrast to the 6.2 per cent growth in the previous quarter, according to advance estimates released by the Ministry of Trade and Industry on Thursday.

“The Singapore economy is projected to expand at a more modest pace in 2016 than envisaged in the October policy review. MAS Core Inflation should also pick up more gradually over the course of 2016 than previously anticipated, and is now likely to fall below 2 per cent on average over the medium term,” MAS said.

The MAS last shifted its currency policy to a neutral policy stance of "zero per cent appreciation" in October 2008 during the global financial crisis. It lowered the rate of appreciation of the policy band twice last year, in January and October.

“The actual outcome of S$NEER movements over the six months since October 2015 has in fact been a 'zero per cent appreciation' compared to the preceding six-month period. The cumulative effects of past S$NEER movements and the new policy path will continue to ensure price stability over the medium term,” it said.


A Credit Suisse analyst said the decision was the right move, given the weakening outlook for growth prospects in Singapore.

“We had been arguing that the central bank could have eased more during the last meeting in October, bringing the slope to zero per cent. Instead, it seems that MAS took a more gradual approach, delaying half of the easing then, to add another half now,” said Mr Michael Wan, an analyst for Asia Ex-Japan Economics at Credit Suisse.

Looking forward, front-end interest rates such as the Singapore interbank offered rate (SIBOR), which is used to price home loans, are likely to rise while the Singapore dollar is expected to weaken further, he said.

“However, the extent of the Singapore dollar’s underperformance will also be dependent on Singapore and global risk sentiment, and whether dollar weakness is sustained from here,” he added.

DBS’ senior currency strategist Philip Wee said the outlook for the Singapore dollar against the US dollar will still be dictated by the greenback’s direction against its trade-weighted basket of currencies.

“Looking ahead, we will probably need to pay more attention to the Fed,” he said, adding that two Federal Reserve presidents – John Williams and Jeffrey Lacker – have suggested that the market may be too “dovish” in their expectations for an interest hike.

Source: CNA/cy