MAS monetary policy shift: What's the significance?

Monetary Authority of Singapore's surprise change to its exchange rate policy means it has taken the Singapore dollar off the path of modest and gradual appreciation.
Monetary Authority of Singapore's surprise change to its exchange rate policy means it has taken the Singapore dollar off the path of modest and gradual appreciation.PHOTO: ST FILE

SINGAPORE - At 8am on Thursday (April 14) morning, the Monetary Authority of Singapore (MAS) announced a surprise change to its exchange rate policy. The Straits Times explains.

1. What did the MAS do?

MAS has 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.

In doing so, the MAS has taken the Singapore dollar off the path of modest and gradual appreciation.

Zero appreciation means that the MAS now has a "neutral" stance on exchange rate policy.

2. Why is this significant?

 

The last time the MAS put the Singdollar policy band on a path of zero appreciation was in October 2008, when the last financial crisis triggered a global recession.

The market had not been expecting the MAS to take such a bearish stance in its April meeting. The MAS has usually been reactive rather than pre-emptive in its policy tweaks, and it is unusual for the central bank to adopt a zero appreciation path in the absence of a recession.

3. What does the MAS decision say about the Singapore economy?

 

The MAS sets monetary policy at two scheduled meetings in April and October every year, based on growth and core inflation forecasts.

In its statement on Thursday, the MAS said that the global economic outlook has "dimmed" since it last met in October last year:

"The Singapore economy is projected to expand at a more modest pace in 2016 than envisaged in the October policy review. MAS Core Inflation should also pick up more gradually over the course of 2016 than previously anticipated, and is now likely to fall below 2 per cent on average over the medium term."

More on the MAS Monetary Policy Statement here.

4. How does this affect the value of the Singapore dollar?

 
 

The Singapore dollar tumbled to $1.36 levels to the US dollar on the news, a sharp depreciation from Wednesday's $1.35 levels.

Until Thursday, the Singdollar had strengthened more than 5 per cent against the greenback this year as traders had been betting on the US Federal Reserve delaying interest rate hikes and causing the dollar to rise more slowly against the Singdollar.

With the MAS moving to guide the Singdollar from rising too steeply against major trade partners, some of those bets had to be called off.