MAS stays pat on Singdollar policy as growth slows, lowers core inflation forecast

MAS said that it will maintain the rate of appreciation, with the width of the policy band and the level at which it is centred also unchanged. PHOTO: ST FILE

SINGAPORE - There will be no change to the Singapore dollar's current pace of appreciation, amid an easing in Singapore's economic growth, although the forecast range for core inflation has been lowered.

After two slight increases to the Singdollar's pace of appreciation, the Monetary Authority of Singapore (MAS) said in its half-yearly review on Friday (April 12) that it will maintain the rate of appreciation, with the width of the policy band and the level at which it is centred also unchanged.

The decision to stand pat on monetary policy was expected by economists, given the United States Federal Reserve signalling no interest rate hikes this year and both domestic growth and core inflation easing.

It came as official advance estimates released on Friday morning showed that Singapore's economic growth slowed to 1.3 per cent in the first quarter - slightly below analysts' expectations of 1.4 per cent expansion compared to the same period a year ago.

Singapore's central bank uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth. The rate is allowed to float within a band that can be adjusted when monetary policy is reviewed.

A stronger currency - which corresponds to tighter monetary policy - counters inflationary pressures by making imports cheaper in Singdollar terms and cooling demand for tradeable goods and services produced here. A weaker currency makes imports more expensive in Singdollar terms, while boosting demand for tradeable goods and services made here.

The exchange rate is managed against a basket of currencies of Singapore's major trading partners, and the Singapore dollar band is now on "a modest and gradual appreciation path of the S$NEER (Singapore dollar nominal effective exchange rate) policy band that will ensure medium-term price stability".

On Friday, the MAS said that "the Singapore economy has slowed, and is likely to expand at a modest pace in the coming quarters".

Core inflation - which excludes the cost of accommodation and private road transport - has come in lower than projected due to weaker global oil prices and a stronger impact from the liberalisation of the retail electricity market, it added.

The MAS said that as a result, it is downgrading its 2019 forecast range for core inflation to 1 per cent to 2 per cent, down from between 1.5 per cent and 2.5 per cent previously.

The figure is expected to come in near the mid-point of the revised range, said the MAS.

It comes against a global backdrop of "significant uncertainty" clouding short-term outlook as growth momentum of the global economy slowed more than expected at the turn of the year alongside sluggish trade after two years of strong expansion.

The MAS, however, also noted that policy stances in China and the US have become more accommodative and global financial conditions have eased.

In Singapore, even as growth in the trade-related cluster decelerates, parts of the financial, business and ICT services sectors "will continue to benefit from steady domestic demand in the region and increased investments in digitalisation", it added.

The Singdollar weakened slightly against the US currency after the MAS announcement on Friday morning. At 10:35am, the US dollar was trading at $1.3562, 0.2 per cent lower than its close of $1.3532 the previous day.

Ms Selena Ling, OCBC Bank's head of treasury research & strategy, said this was likely a kneejerk reaction to the softer growth and inflation dynamics for the Singapore economy and the MAS signal to hold its Singdollar policy for the next six months.

She added: "At this juncture, the October monetary policy statement also looks like a non-event with no change taking place. But a lot can happen in six months, such as if a US-China trade deal is struck and global green shoots sprout.

"We just have to wait and see. Like the Fed, MAS is likely to be in data-dependent mode but not unduly bearish."

HSBC Asean chief economist Joseph Incalcaterra and senior Asia FX strategist Joey Chew said in a joint report that the MAS' pause was a logical decision.

With the new forecast, MAS is signalling that core inflation will stay below the long-run average, which means there is no need for tighter monetary policy, they said.

They agreed with Ms Ling that "even though there is room for further tightening should conditions warrant, MAS is likely to keep conditions on hold for the rest of the year."

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