MAS not expected to change Singdollar policy on Friday but save firepower for next year

The logo of the Monetary Authority of Singapore (MAS) is pictured at its building in Singapore.
The logo of the Monetary Authority of Singapore (MAS) is pictured at its building in Singapore. PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Singapore's central bank is being put to the test as it navigates a sluggish economy and falling consumer prices with a policy tool focused on the currency.

Unlike most advanced nations, and because of its heavy dependence on exports, Singapore targets the exchange rate instead of interest rates to maintain price stability.

Analysts are looking to the Monetary Authority of Singapore (MAS) on Friday to provide any clues on whether it prefers a weaker Singapore dollar to bolster an economy that probably didn't grow at all in the third quarter from the previous three months.

The Singdollar is managed against an undisclosed basket of currencies of its major trading partners and competitors. MAS intervenes in the market to keep the rate within an unspecified range and changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the Singapore currency.

Here's a guide to what to watch for in MAS' statement due at 8 am on Friday.

Adjusting the Slope

At its last policy decision in April, MAS eased its stance by saying it won't seek an appreciation in the exchange rate - effectively adopting a flat slope that it last used during the 2008 global financial crisis.

Twenty-one out of 24 economists surveyed by Bloomberg expect the MAS to maintain its current stance as the Singapore economy probably avoids a recession and keeps its firepower for next year.

"The data is not so strong, and global growth remains weak, but it's kind of stable," Masashi Murata, vice president of investor services at Brown Brothers Harriman, said by phone from Tokyo. "I don't think MAS needs to make a move now."

Shifting the centre of the band

Even if the MAS keeps policy unchanged, there's an argument to be made for easing as a way of supporting growth in the face of weak exports.

MAS could do that by shifting the centre of the policy band to a lower level, which would signal its preference for a weaker exchange rate. But that's only likely if there's a significant deterioration in the global economic outlook, said Krystal Tan, an economist with Capital Economics Ltd. in Singapore.

"Doing that would raise fears of a competitive devaluation," Ms Tan said by phone. "There's also no need to do so, because the economy is still growing, according to government projections."

The MAS last re-centred the band in April 2011, lifting it higher in a tightening move that sought to put a lid on inflationary pressures.

Widening the band

A third policy option for MAS is a widening of the policy band - technically a neutral stance intended to allow more volatility in the Singdollar - which is not anticipated by any of the economists surveyed.

MAS has only changed the width four times in the past 15 years, with the last being a narrowing move in April 2012.

The central bank's move in April last year was its second unexpected decision in less than 16 months, following an unscheduled policy change in January last year to combat declining consumer prices. Inflation in Singapore has been in negative territory since November 2014, mainly due to lower oil costs and government measures to rein in property values.

But MAS said in July that headline inflation - which was at minus 0.3 per cent in August- may turn positive this year, while the core measure will probably continue to rise.

The Ministry of Trade and Industry is also due to release its advanced estimate for third-quarter gross domestic product at 8am on Friday.

The median estimate of 14 economists surveyed by Bloomberg is for GDP to post zero gains on an annualized basis from the previous three months, when it grew 0.3 per cent.

MAS is forecasting expansion of between 1 per cent and 2 per cent this year, with Deputy Prime Minister Tharman Shanmugaratnam saying last month that growth may come in closer to the lower end of that estimate.