Brexit may prompt MAS easing as Singapore dollar near top of policy band

[SINGAPORE] The strong Singapore dollar may test the upper limit of the central bank's policy band in the event Britons vote to leave the European Union, prompting speculation among analysts of policy easing by the Monetary Authority of Singapore.

The Singapore dollar's nominal effective exchange rate (NEER) is close to the top of the band already, and the central bank could intervene to keep the currency within its limits if the vote triggers safe-haven flows into Singapore.

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 NEER.

If the Brexit shock is powerful enough, the MAS may even consider re-centring the currency band lower, some analysts say. This would be a one-off weakening of the currency.

"In case of an exit, we're...likely to start talking about an unscheduled meeting from the MAS where they might re-centre lower, because a UK exit might result in a recession across a fair amount of the world," RBS economist Vaninder Singh said.

Mr Singh estimated that the S$NEER was currently about 1.9 per cent above the mid-point, while the upper end of the band was 2.0 per cent above it.

ANZ's head of Asia research Khoon Goh - who saw the risk that the MAS may have to intervene to keep the currency within the band, but did not see an imminent policy easing - estimated the S$NEER was around 1.4 per cent above the mid-point, with the upper end at 2 per cent.

In April, the MAS eased policy for the third time since January 2015 against a backdrop of low inflation and slowing economic growth, by removing the "modest and gradual" appreciation path of the Singapore dollar and shifting to a policy of zero per cent appreciation.

On Brexit risks, the MAS said this week it was monitoring the developments closely and that the banking system was resilient.

"Nonetheless, the current uncertain external environment underscores the importance of staying vigilant to new or growing risks and vulnerabilities," it said in a statement.

The Singapore dollar has risen 6.1 per cent against the US dollar so far this year.

REUTERS