The logo of the Monetary Authority of Singapore is seen at its building in Singapore. The city state’s central bank unexpectedly eased monetary policy yesterday,
saying a plunge in commodity prices had significantly changed its inflation outlook and joining global policymakers in seeking to defuse deflationary pressures.
Reuters/Singapore
Singapore’s central bank unexpectedly eased monetary policy yesterday, saying a plunge in commodity prices had significantly changed the city state’s inflation outlook and joining global policymakers in seeking to defuse deflationary pressures.
In an unscheduled policy statement, the Monetary Authority of Singapore (MAS) said that it is reducing the slope of its policy band for the Singapore dollar because the inflation outlook has “shifted significantly” since its last review in October 2014.
The MAS, which said the change in outlook largely reflected the collapse in global oil prices, kept the width and mid-point of the band unchanged. The surprise easing, the first unscheduled policy change in over a decade and coming before the April review, sent the Singapore dollar skidding to 1.3570 per US dollar, its weakest since August 2010.
“Imported inflationary pressures are receding, with global oil prices likely to stay subdued this year,” the MAS said.
The central bank said that it would continue to stick with a policy of allowing the Singapore dollar to appreciate modestly and gradually against a basket of currencies.
The MAS manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate (NEER).
Given the secrecy around the band and its parameters, analysts at Citi suspected that the absence of the word “slightly” in the central bank’s description of the lowering of the policy band, hinted at a relatively big change in the extent of appreciation allowed in the currency.
They estimated that policy has until now been to allow a 2% annualised appreciation of the trade-weighted index. That could now have changed to 1% or even 0.5%, the analysts wrote in a note. Singapore rarely alters policy outside of its two regular reviews, which are now held in April and October. The last unscheduled policy change was in October 2001, in the wake of the September 11 attacks on the US.
The central bank probably felt the need to act now rather than wait because of the significant downgrade to its inflation outlook, analysts said.
“I infer that it’s just the magnitude of the revision,” said Tim Condon, head of research Asia for ING Bank in Singapore.
The MAS cut its forecast range for all-items inflation in 2015 by a full percentage point to between -0.5% and 0.5%, from 0.5% to 1.5% previously.
The central bank cut its 2015 core inflation forecast range by even more, to between 0.5% and 1.5%, from 2% to 3%. Short-term money rates spiked higher as traders adjusted to the likely pressure on forward markets from the ensuing weakness in the Singapore dollar. Some analysts said the MAS could ease policy further at its next review in April, especially noting the large downgrade to its core inflation forecast. Jonathan Cavenagh, senior FX strategist with Westpac in Singapore, said the more benign price backdrop “leaves the door wide open” for another policy adjustment in April.
Yesterday’s move follows similar surprises in global monetary policymaking, including the Bank of Canada’s shock rate cut last week and a larger-than-expected bond-buying stimulus programme by the European Central Bank – all of which are aimed at fighting off the threat of deflation from plunging oil and slowing global growth.
Singapore’s economy has also been tepid, with growth slowing more than expected in the fourth quarter as the manufacturing sector contracted in the face of erratic global demand, raising concerns about the outlook for 2015.
