MAS stands pat on monetary policy, in line with expectations

MAS stands pat on monetary policy, in line with expectations

A neutral policy stance is needed to ensure medium-term price stability, says the Monetary Authority of Singapore (MAS) in its final scheduled monetary policy review of 2016.

SINGAPORE: The Monetary Authority of Singapore (MAS) kept its exchange-rate based monetary policy unchanged at its semiannual review on Friday (Oct 14), in line with market expectations.

The central bank said it will maintain the rate of appreciation of the Singapore dollar's nominal effective exchange rate (S$NEER) policy band at zero per cent. The width of the policy band and the level at which it is centred will also be unchanged, it added in a policy statement published on its website.

"MAS assesses that a neutral policy stance will be needed for an extended period to ensure medium-term price stability. The current policy band provides some flexibility for the S$NEER to accommodate the near-term weakness in inflation and growth."

The Singapore dollar was seen trading at 1.3860 against the US dollar as of 8.20am, down 0.3 per cent after briefly gaining by the same magnitude immediately after the MAS announcement.

"The combination of limited inflationary pressure and a very fragile growth outlook suggests that policy will be left neutral for some time, as was underscored by the statement," said Mr Benjamin Shatil, ASEAN economist at JP Morgan.

MAS also noted that core inflation will likely rise slightly from around 1 per cent this year to an average of 1 to 2 per cent in 2017, amid emerging slack in the labour market and generally subdued consumer sentiment. Over the medium term, core inflation is expected to trend slightly below 2 per cent on average.

Core inflation, which excludes private road transport and accommodation costs, is a key policy consideration for the central bank.


Analysts largely expected the central bank, which manages the economy through the currency rather than setting interest rates, to maintain its current stance after having eased monetary policy in April. Back then, the MAS flattened the slope of the band it uses to guide the local currency against an undisclosed trading basket, reducing the rate of appreciation to zero per cent.

Analysts have also said they expect the central bank to save its ammunition for rainier days given that external headwinds and sluggish growth are likely here to stay. Deputy Prime Minister Tharman Shanmugaratnam cautioned last month that growth is likely to come in at the lower end of the 1 to 2 per cent range in 2016, while Trade and Industry (Trade) Minister Lim Hng Kiang said earlier this week that the possibility of "some quarters of negative growth" cannot be ruled out.

As such, ANZ economist Ng Weiwen said the odds of further monetary easing next year – likely in April if it happens – will rise if weaknesses in Singapore's economy become more apparent.

"To some extent, they are now already in neutral policy stance so I think they would rather remain cautious and not rush into policy easing ... (unless) growth continues to fall short," Mr Ng told Channel NewsAsia.

Nomura economist Brian Tan said the next step that the central bank can take is a re-centring of the policy band downwards, therefore depreciating the Singapore dollar.

A weaker Singdollar would boost the country's exports and improve the country's overall competitiveness against its major trading partners, especially in times when export numbers paint a worrisome picture for the trade-reliant economy. However, a cheaper currency may also weigh down domestic demand as it makes imports more expensive.

Mr Tan added that it will take “special and exceptional circumstances” such as a sharper slowdown in China’s economy or a big risk event in the financial markets to prompt the central bank into further easing.

Advance estimates released by the Ministry of Trade and Industry on Friday showed Singapore's economic growth slowing sharply to 0.6 per cent year-on-year in the third quarter.

Source: CNA/sk