MAS leaves Singdollar policy unchanged on recovery outlook

SINGAPORE – The Monetary Authority of Singapore (MAS) is holding steady on monetary policy while the Singapore economy recovers from the impact of the coronavirus pandemic and signalled its accommodative stance will remain appropriate for some time.

As widely expected, Singapore’s central bank left unchanged the Singapore dollar’s rate of appreciation at zero per cent per annum of its policy band, it announced in its latest twice-yearly monetary policy review on Wednesday (Oct 14).

There will be no change to the width of the policy band and the level at which it is centred.

“The Singapore economy is expected to see a recovery in 2021, alongside receding disinflation risk. However, the underlying growth momentum will be weak, and the negative output gap will only narrow slowly in the year ahead,” MAS said.

It added that an accommodative policy stance will remain appropriate for some time as core inflation is expected to stay low.

“This will complement fiscal policy efforts to mitigate the economic impact of Covid-19 and ensure price stability over the medium term.”

MAS’ policy stance was in line with analysts’ expectations. All 13 economists in a Reuters poll forecast MAS would keep its policy settings unchanged on hopes the economy will recover on further easing of Covid-19 restrictions and unprecedented budget packages amounting to nearly $100 billion, with monetary policy playing a supportive role.

Singapore started a gradual reopening of the economy in June, sparking a steady recovery in economic activity. Third-quarter flash GDP data out also on Wednesday morning showed the economy has moved past the trough of its worst-ever recession, with gross domestic product rebounding by 7.9 per cent on a quarter-on-quarter seasonally adjusted basis in the July to September period.

The rebound comes after the 13.2 per cent quarter-on-quarter plunge in the second quarter that included the April 7 to June 1 circuit breaker period.

MAS also upgraded its 2020 forecast range for both core and overall inflation to -0.5 to 0 per cent. Its previous 2020 forecasts for both indicators was -1 to 0 per cent.

It tips core inflation to come in next year at 0 to 1 per cent, while overall inflation is expected to be between -0.5 to 0.5 per cent.

MAS uses the Singapore dollar’s nominal effective exchange rate (S$NEER) as its main policy tool rather than interest rates, because Singapore is a small and open economy with a heavy dependence on trade. The S$NEER is the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies of the nation’s major trading partners. The S$NEER is allowed to float within an unspecified band. Should it go out of this band, MAS steps in by buying or selling Singdollars.

The central bank changes its monetary policy by adjusting the slope, width and mid-point of this band based on assessed risks to the country’s growth and inflation.

It took the unprecedented step in its April review of both lowering the midpoint of its currency band and reducing the slope to zero. That meant it allowed for a weaker exchange rate to head off deflation and support Singapore’s export-reliant economy as the nation braced for a deep recession.

Since that decision, the Singapore dollar has traded stronger in line with global trading partners amid signs of economic recovery. MAS said on Wednesday that the S$NEER has hovered slightly above the mid-point of the new policy band.

“The relative stability of the S$NEER has reflected the strengthening of the Singdollar against the US dollar, offset by its weakening against a number of regional currencies, it added.

Meanwhile, core inflation – a key consideration for MAS’ monetary policy which aims for price stability conducive to sustained economic growth – stayed negative for the seventh consecutive month in August but eased to minus 0.3 per cent.

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