Update: Singapore's MAS cuts slope of S$NEER policy band along with 2015 inflation forecast, S$ weakens against greenback

The Monetary Authority of Singapore (MAS) on Wednesday made a surprise cut to the slope of its Singapore dollar nominal effective exchange rate (S$NEER) as inflation pressure eases.

The central bank will continue with the policy of a modest and gradual appreciation of the S$NEER policy band but the slope of the policy band will be cut. There will be no change to its width and the level at which it is centred. INFOGRAPHIC: How Singapore's monetary policy works

"This measured adjustment to the policy stance is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy,'' it said.

MAS has also cut its inflation forecasts for 2015, as imported inflationary pressures are receding and global oil prices are likely to stay subdued this year after falling sharply since its last monetary policy statement in October.

CPI-All Items inflation is now projected to come in at -0.5-0.5 per cent, from the 0.5-1.5 per cent expected in October. MAS Core Inflation is expected to be 0.5-1.5 per cent this year, down from the earlier forecast range of 2-3 per cent.

"Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore's CPI inflation outlook for 2015. As part of its ongoing economic surveillance, MAS has assessed that it is appropriate to adjust the prevailing monetary policy stance,'' the central bank said.

The West Texas Intermediate (WTI) benchmark has declined by around 50 per cent to below US$50 per barrel in late January 2015, from US$91 per barrel at end-September 2014. The fall in global oil prices have resulted in overall import prices declining by an average of 6.5 per cent year-on-year in Oct-Nov 2014, the steepest correction since the third quarter 2009.

For 2015 as a whole, global oil prices are unlikely to show a significant rebound and should remain much lower than the US$93 average recorded last year, MAS said.

"At the same time, the extent to which businesses will pass on accumulated costs to consumer prices could be somewhat constrained in the near term by the moderate economic growth environment. Car prices and imputed rentals on owner-occupied accommodation will also continue to dampen overall inflationary pressures amid the increase in the supply of COEs and newly-completed housing units.''

In October 2014, MAS maintained a modest and gradual appreciation path of the S$NEER policy band, with no change to its slope, width, and the level at which it was centred. This policy stance, which has been in place since April 2012, was assessed to be appropriate for containing domestic and imported sources of inflation and for anchoring inflation expectations.

MAS left intact its 2015 growth forecast for the Singapore economy at 2-4 per cent.

According to Bloomberg, the Singapore dollar slid to its weakest level since 2010, sinking as much as 1.3 per cent following the MAS announcement. It dropped to as low as S$1.3569 per greenback.

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INFOGRAPHIC: How Singapore's monetary policy works