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SINGAPORE: The Monetary Authority of Singapore (MAS) on Wednesday (October 14) kept its monetary policy based on the exchange rate unchanged after two consecutive rounds of easing, in line with market expectations.
In its semi-annual monetary policy statement, Singapore’s central bank said it will “maintain a zero percent annual appreciation rate of the policy band.”
There are no changes to the width of the policy band and the level it is focused on.
All 14 economists polled by Reuters had predicted that the central bank would stay on top of its currency setup.
The MAS said Singapore’s economy is expected to see a recovery next year, along with a reversal of the risk of disinflation. But the underlying growth momentum will be “weak” and the “negative output gap will only narrow slowly in the next year.”
READ: Singapore’s third-quarter GDP contracts at a slower pace of 7% after the economy gradually reopens after the circuit breaker
He added that although core inflation, a key policy consideration for the central bank, will gradually rise and turn positive in 2021, it will remain well below its long-term average.
“As core inflation is expected to remain low, MAS assesses that an accommodative policy stance will remain appropriate for some time,” it said in its policy statement.
“This will complement fiscal policy efforts to mitigate the economic impact of COVID-19 and ensure price stability in the medium term.”
Unlike most central banks that manage monetary policy through the interest rate, the MAS uses the exchange rate as its main policy tool.
This refers to the nominal effective exchange rate of the Singapore dollar (S $ NEER): the exchange rate of the Singapore dollar administered against a basket of trade-weighted currencies of Singapore’s major trading partners.
The S $ NEER can float within an unspecified band. If it leaves this band, the MAS intervenes by buying or selling Singapore dollars.
READ: The S $ NEER and its slope, width and center: Questions about Singapore’s monetary policy
The central bank also changes the slope, width, and midpoint of this band when it wants to adjust the rate of appreciation or depreciation of the local currency based on assessed risks to Singapore’s growth and inflation.
The MAS slowed the rate of appreciation of the Singapore dollar “slightly” in October last year as growth slowed due to trade tensions.
In March, it followed up with another easing move by further reducing the slope of its currency band to zero and re-centering the band downward.
He said then that fiscal policy played the “leading role” in mitigating the economic impact of COVID-19.
So far, the Singapore government has injected nearly S $ 100 billion in stimulus and emergency relief measures to mitigate the impact of the pandemic.
ECONOMIC PERSPECTIVES
Separate preliminary data released Wednesday morning showed the economy contracted at a slower pace of 7% year-on-year in the third quarter, compared with a 13.3% drop in the second quarter.
The best performance in the third quarter came as Singapore gradually reopened its economy following the COVID-19 “circuit breaker” that was implemented between April 7 and June 1, the Ministry of Commerce and Industry said.
READ: Singapore lowers GDP forecast range for 2020 as economy registers record quarterly decline in second quarter
Beyond this “immediate rebound”, MAS said Singapore’s economic growth momentum is likely to be “modest” given a sluggish external environment, persistent weakness in some domestic service sectors and a limited recovery in the related industry. the trips.
Singapore’s economy is forecast to contract by 5% to 7% this year. You are poised to see “above trend growth” for 2021, due to this year’s low base effect.
“Barring a further worsening of the course of the COVID-19 pandemic, Singapore’s economy is expected to expand in 2021, following this year’s recession,” the central bank added.
The MAS also improved its inflation forecasts this year, noting that both core and headline inflation will be between -0.5 and 0 percent. Previously, it estimated that both indicators averaged between -1 and 0 percent.
For next year, it forecasts core inflation to be between 0 and 1 percent, while headline inflation is forecast to be between -0.5 and 0.5 percent.
Alex Holmes, an economist at the research firm Capital Economics, said MAS’s decision to keep its policy on hold “was not a surprise.”
Given that the output gap, defined as the difference between an economy’s actual output and its potential output, will remain large for some time, monetary policy is likely to remain supportive.
“We expect the policy setting to remain unchanged for at least the next year,” Holmes added in a note.
