Singdollar's rate of appreciation to stay unchanged at 0%

MAS signals its stance would hold for some time, given that core inflation is likely to remain low

MAS' policy stance was in line with analysts' expectations.
MAS' policy stance was in line with analysts' expectations.ST PHOTO: KUA CHEE SIONG

Market expectations that the central bank would leave its policy on the Singapore dollar unchanged were right on the money yesterday.

It announced that it would leave the dollar's rate of appreciation at 0 per cent against a trade-weighted basket of currencies of the nation's major trading partners.

There were also signals in its half-yearly review that the stance would hold for some time, given that core inflation is expected to stay low while the economy recovers from the pandemic.

The decision will also mean that interest rates - already at rock bottom - will largely stay unchanged.

The Monetary Authority of Singapore (MAS) said: "The Singapore economy is expected to see a recovery in 2021. However, the underlying growth momentum will be weak, and the negative output gap will only narrow slowly in the year ahead."

It added that its approach "will complement fiscal policy efforts to mitigate the economic impact of Covid-19 and ensure price stability over the medium term".

OCBC Bank head of treasury research and strategy Selena Ling said that MAS' tone is "basically status quo with a tinge of dovishness out into 2021".

A clearer picture next year of global and domestic economic recovery prospects and inflation might call for a reconsideration of its policy stance, Ms Ling said.

She added: "With MAS in wait-and-see mode, we expect short-term Singapore interest rates to also tread water around current ranges."

Barclays Bank analysts Brian Tan, Ashish Agrawal and Yile Gu said that the MAS might tighten its foreign exchange policy if the global economy recovers faster than expected, especially if there is notable progress on a Covid-19 vaccine.

"Conversely, the bar for further easing in policy looks relatively high... unless there is another collapse in global or domestic economic activity," they said.

All 13 economists in a Reuters poll forecast that the MAS would keep its policy settings unchanged on hopes that the economy will recover on further easing of Covid-19 restrictions and unprecedented Budget packages amounting to nearly $100 billion.

Flash data also released yesterday morning showed that the economy has moved past the trough of its worst recession, with gross domestic product rebounding by 7.9 per cent from the second quarter to the third on a seasonally adjusted basis.

It comes after the 13.2 per cent quarter-on-quarter fall in the second quarter that included the April 7 to June 1 circuit breaker period.

The MAS also upgraded its 2020 forecast range for both core and overall inflation to minus 0.5 per cent to 0 per cent. Its previous 2020 forecasts for both were minus 1 per cent to 0 per cent.

Core inflation - a key consideration for monetary policy, which aims for price stability conducive to sustained economic growth - stayed negative for the seventh consecutive month in August, but eased to minus 0.3 per cent.

The MAS tips core inflation to come in next year at 0 per cent to 1 per cent, while overall inflation is expected to be between minus 0.5 per cent to 0.5 per cent.

It manages the Singdollar within an unspecified band against a basket of currencies of key trading partners. It can adjust this band based on how it sees risks to the country's growth and inflation.

It took the unprecedented step in its April review to both lower the midpoint of the currency band and reduce the slope to zero.

That meant it allowed for a weaker exchange rate to head off deflation and support Singapore's export-reliant economy as the nation braced itself for a deep recession.

Since that decision, the Singapore dollar has traded stronger in line with global trading partners amid signs of economic recovery.

A version of this article appeared in the print edition of The Straits Times on October 15, 2020, with the headline 'Singdollar's rate of appreciation to stay unchanged at 0%'. Print Edition | Subscribe