MAS makes surprise adjustment to Singapore monetary policy, cuts inflation forecast

MAS' twice-yearly policy reviews in April and October will stay even as it maintains the flexibility to conduct "off-cycle" changes. -- PHOTO: ST FILE
MAS' twice-yearly policy reviews in April and October will stay even as it maintains the flexibility to conduct "off-cycle" changes. -- PHOTO: ST FILE
The Monetary Authority of Singapore announced on Wednesday a surprise adjustment to its monetary policy to slow the appreciation of the Singapore dollar.  -- PHOTO: ST FILE
The Monetary Authority of Singapore announced on Wednesday a surprise adjustment to its monetary policy to slow the appreciation of the Singapore dollar.  -- PHOTO: ST FILE

SINGAPORE - The Monetary Authority of Singapore announced on Wednesday a surprise adjustment to its monetary policy to slow the appreciation of the Singapore dollar. This is mainly because inflation has become less of a threat given lower oil prices.

In an unscheduled policy statement, the MAS said it will maintain the modest and gradual pace at which the Singapore dollar appreciates against a basket of other currencies, but reduce the slope of the band within which this trade-weighted exchange rate fluctuates. It made no change to the width and level at which the band is centered.

Its move surprised market watchers who had expected no sudden change in its monetary policy stance and saw the Singapore dollar head for its biggest slide in almost three years.

MAS also cut its inflation forecast for 2015 to -0.5 per cent to 0.5 per cent, from the 0.5 per cent to 1.5 per cent it had expected in October, mainly because of falling oil prices.

"Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore's CPI inflation outlook for 2015," the MAS said.

Singapore's consumer prices fell for a second straight month in December.

"This measured adjustment to the policy stance is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy," MAS added.

Said Phillips Futures in an analyst note: "The reduction in the currency slope is a major plus point for the economy. Singapore's exports have been carring the weight of a strong Singapore dollar and high pass-through labour costs. With the reduction in band slope, one load is at least taken off Singapore's shoulder."

The MAS move had an immediate effect on the Singapore dollar which tumbled to 1.3509 to the US dollar as at 9:40am - it's lowest since August 2010- from 1.3426 on Tuesday.

The Singapore dollar recovered some ground to trade at 1.3522 at around 3pm on Wednesday.

The central bank guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band.

MAS said that over the last three months, the S$NEER (Singapore dollar nominal effective exchange rate) has generally fluctuated around the middle of the policy band. The depreciation of the S$ against the broad-based strength of the US dollar was partly offset by the appreciation of the S$ against the Malaysian ringgit, euro, and Japanese yen.

"Thus, movements in the S$NEER have been relatively muted compared to bilateral S$ movements against the major currencies. The three-month S$ SIBOR increased slightly from 0.41 per cent at end-September 2014 to 0.46 per cent at end-December. It rose further to 0.65 per cent in mid-January 2015, and has since stayed at around this level."

However, the global economy has continued to grow at an uneven pace across countries, with stronger growth in the US partly offset by weakness in the Eurozone, Japan, and China. Even as some Asian economies benefit from the US recovery and the mild upturn in the global IT industry, other regional economies face weaker commodity exports, MAS said.

Against this backdrop, the Singapore economy grew more slowly, by 1.6 per cent in the fourth quarter of last year, about half the pace of expansion in the previous three months.

"Looking ahead, the mixed outlook for the global economy will continue to weigh on the external-oriented sectors while the domestic-oriented sectors should stay broadly resilient," said MAS.

The central bank said its 2015 growth forecast for the Singapore economy remains at 2-4 per cent.

It said it will continue to be vigilant over developments in the external environment and their impact on the domestic economy, and stands ready to curb sharp movements in the Singapore dollar nominal effective exchange rate.

Its next scheduled twice-yearly policy statement is in April.

ann@sph.com.sg