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Further easing measures by Singapore's MAS at next policy meeting possible, say economists

Janet Ong
Finance Editor
Skyline of the financial business district in Singapore. (AFP file photo)

SINGAPORE — The Monetary Authority of Singapore could loosen its monetary policy further in its next review if the risks to global economic growth remain, economists said.

The central bank on Monday (14 October) eased its monetary policy for the first time since April 2016, as widely expected, as the Singapore economy narrowly escaped a recession in the third quarter.

The MAS said in its review that it will “reduce slightly the rate of appreciation of the dollar’s nominal effective exchange rate (S$NEER) policy band. There will be no change to the width of the policy band and the level at which it is centred”.

The central bank manages monetary policy through exchange rate settings rather than interest rates, letting the Singapore dollar move against the currencies of its main trading partners within an undisclosed policy band. It changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the Singapore dollar.

The MAS has held on to a “neutral” stance for two years before tightening twice in 2018 to allow for a “modest and gradual” appreciation of the local currency in a bid to control rising price pressures.

“The MAS will continue to closely monitor economic developments and is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly,” it said in its half-yearly review.

Given that currently there is no technical recession or full-year recession, the policy easing is a calibrated move by the MAS, said Selena Ling, head of treasury research and strategy, OCBC Bank.

Terence Wu, currency economist at OCBC Bank said, “At the risk of stating the obvious, the MAS added for good measure that it ‘is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly’.

“We think this is telling of its intentions. Further policy easing measures may be on the cards, and we do not rule out a further reduction of slope to zero appreciation in the next meeting.”

Irvin Seah, senior economist at DBS, said “the central bank has kept the door for another easing should the already weak growth and inflation outlook deteriorate significantly”.

Slowing growth

Singapore has been hit hard by the escalating US-China trade dispute, which has disrupted global supply chains and adversely affected business investment and corporate profits.

The city-state avoided a technical recession, according to data released by the Ministry of Trade and Industry on Monday. Its economy expanded by 0.6 per cent on a quarter-by-quarter seasonally adjusted annualised basis in the third quarter, compared with a revised 2.7 per cent contraction a quarter ago, flash estimates showed.

A technical definition is defined as two consecutive quarters of economic contraction.

On a year-on-year basis, the economy grew by 0.1 per cent, unchanged from the previous quarter.

MAS said Singapore’s 2019 GDP growth will likely be around the midpoint of the 0 to 1 per cent, saying that the output gap has turned “slightly negative” and is expected to persist into 2020.

On inflation, MAS projected the all-items CPI to be around 0.5 per cent this year and average 0.5-1.5 per cent in 2020. Core inflation is expected to come in at the lower end of the 1-2 per cent range in 2019 and average 0.5-1.5 per cent next year, it forecast.

“We anticipate another anaemic 4Q19 GDP growth, with the risk that full-year 2019 GDP growth may come in on the lower end of the official 0 to 1% yoy forecast, said Ling at OCBC Bank. Without a complete reversal of the US-China trade tariffs, the uncertainty in the global trade environment would continue to linger, she added.

Domestically, tight property measures, the weakening labour market and upcoming stricter foreign worker measures will weigh on the growth outlook, said Chua Hak Bin and Lee Ju Ye, analysts at Maybank Kim Eng. They maintain their GDP forecast at 0.6 per cent growth in 2019 and 1.6 per cent growth in 2020. “We expect the MAS to maintain the slight appreciation stance at the next meeting,” Chua said.

DBS’ Seah said the worst of the manufacturing growth cycle could be over, but growth in this sector will remain lacklustre amid weak global demand and uncertainties over the ongoing US-China trade talks.

“Growth may have bottomed but the improvement ahead could be weak,” said Seah, who expects GDP growth to rise in 2020 to 1.4 per cent, from a revised 0.6 per cent this year.

About 65 percent of 5,306 people who voted in informal poll conducted by Yahoo Finance Singapore expect the nation to enter a recession this year.

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