'Sufficient room' for Singdollar to ease within current policy stance in face of coronavirus outbreak: MAS

MAS reduced slightly the rate of appreciation of its Singdollar exchange rate policy band in October 2019.
MAS reduced slightly the rate of appreciation of its Singdollar exchange rate policy band in October 2019.PHOTO: ST FILE

SINGAPORE - Singapore's central bank said on Wednesday (Feb 5) that its current exchange-rate band has enough room to accommodate an easing of the local currency, even as monetary policy stance remains unchanged.

The Monetary Authority of Singapore (MAS) was responding to media queries about its monetary policy stance, given that traders are betting that central banks will loosen the policy to support the economy due to the coronavirus outbreak.

The Bank of Thailand cut its benchmark interest rate to a record low on Wednesday as the coronavirus spread, which originated in the central Chinese city of Wuhan, put even more pressure on the struggling economy. 

The Singapore dollar slid to a four-month low after the MAS statement on Wednesday, trading down 0.7 per cent to 1.3812 to the US dollar as of 1:30pm from Tuesday’s close. It earlier fell as much as 1 per cent to 1.3853.

The MAS said that the Singdollar has been fluctuating near the upper bound of the policy band since its last review in October, when it reduced slightly the Singdollar appreciation rate, the first easing since April 2016.

“There is therefore sufficient room in the band... to ease in line with any weakness in the Singapore economy in the coming months,” the MAS said.

A weaker currency, corresponding to policy easing, makes imports more expensive in Singdollar terms, while making Singapore exports more competitive.

The Singdollar is weighed against a basket of currencies, and it is allowed to fluctuate within an unspecified band, unlike most central banks that use interest rates to manage their currencies. The MAS regulates the Singdollar by buying or selling the currency when it goes out of the band. 

The MAS added that it is “monitoring economic developments closely” and that the next half-yearly monetary policy review “remains as scheduled” in April this year.

DBS Bank foreign exchange strategist Philip Wee said: “The MAS statement tells us that there will be no urgency for an inter-meeting easing in the Singdollar policy before the next scheduled policy review.”

 
 

He notes that the appreciation of the Singdollar “has held in the stronger half of the policy band throughout the United States-China trade war”.

“Singapore averted a technical recession because the impact from the trade war was not broad-based and confined mostly to trade and manufacturing,” he added.

“Given the potential negative spillover from the coronavirus into domestic demand and services... it is not unreasonable for the (Singapore) currency to reposition at a more neutral level, currently just below the mid-point of the policy band,” said Mr Wee.

He predicts that a further deterioration in the coronavirus outbreak would keep the Singdollar in the lower half of the band - between $1.376 to $1.403 against the US dollar. 

The bank is keeping to its Singdollar forecast of $1.40 against the greenback by March.

Maybank foreign exchange research head Saktiandi Supaat said: “The severity of the outbreak and its impact on the local economy, especially the tourism industry and sectors such as manufacturing tied to Chinese demand, will likely come into policy consideration (for the upcoming review).”

He noted that potential measures targeted at the tourism and consumer sectors, as announced by the Government might also help allay market concerns.

He added: “But our baseline view is still that the outbreak would be contained at some point,” he added. 

CIMB Private Banking economist Song Seng Wun said that the virus outbreak has made it clear that Singapore is in for a tough first quarter, but the economic forecast remains unchanged so far.

“We are not in that period of great uncertainty yet,” he said, adding that economic indicators such as growth and inflation have not began flashing warning signs. 

Correction: The headline of an earlier version of the article said there is "sufficient room" for monetary policy to ease. That is incorrect.  It should be "sufficient room" for the Singapore dollar to ease within MAS' current policy band. We are sorry for the error.