MAS springs surprise: slower S$ gains

Singapore

SINGAPORE'S central bank astonished markets on Wednesday when it eased monetary policy and shifted inflation forecasts significantly lower, on the back of a sharp drop in global oil prices.

In a rare unscheduled monetary policy statement, the Monetary Authority of Singapore (MAS) said that it would allow the Singapore dollar to appreciate at a slower pace against a trade-weighted basket of currencies.

To do so, it will reduce the slope of the S$NEER (Singapore nominal effective exchange rate) policy band, while keeping unchanged the width and level at which it is centred.

In the markets on Wednesday, the Singapore dollar hit multi-year lows against the US dollar and retreated against regional currencies, including the Malaysian ringgit and Indonesian rupiah.

MAS also cut its 2015 inflation forecasts drastically - headline inflation is now projected to come in at -0.5 to 0.5 per cent, and core inflation at 0.5 to 1.5 per cent (compared to earlier forecasts of 0.5 to 1.5 per cent, and 2 to 3 per cent respectively).

Its growth outlook for this year, however, remains unchanged - gross domestic product (GDP) is expected to increase 2-4 per cent.

The central bank's surprise move marks the first off-cycle policy adjustment in over a decade; the last and only time the MAS tweaked its monetary policy stance off-schedule was in October 2001. Then, it had announced a widening of its policy band, in light of more volatile market conditions following the Sept 11 terrorist attacks.

This time around, the key factor was the drastic and swift slump in oil prices, amid significant increases in supply and weaker prospects for global demand. With oil taking up a weight of about 5 per cent on Singapore's consumer price index (CPI) basket, nose-diving oil prices can have a significant and material impact on inflation figures.

Indeed, MAS noted: "The outlook for inflation has shifted significantly since the last monetary policy statement in October 2014, largely due to the decline in global oil prices."

The West Texas Intermediate (WTI) benchmark has declined by around 50 per cent from US$91 per barrel at end-September 2014 to below US$50 per barrel this month. MAS said that this has resulted in overall import prices declining by an average of 6.5 per cent year-on-year in October to November 2014 - the steepest correction since Q3 2009.

Assured that there'll be no sharp recovery anytime soon, MAS said: "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."

The new inflation forecasts assume an average global oil price range of US$40-70 for 2015.

Referring to the SGD policy band's reduced slope as a "measured adjustment", MAS said that the change in policy stance "is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy".

Beyond falling oil prices, MAS also flagged another factor that prompted a change in its inflation outlook: the weaker-than-expected pass-through of business costs to consumer prices. Coupled with enhanced medical subsidies that have led to a one-off reduction in the prices of healthcare services, inflation has declined in recent months.

Core inflation - which excludes the costs of accommodation and private road transport - moderated to 1.6 per cent year on year in Q4 2014 from 2.1 per cent in Q3, while headline inflation fell to -0.1 per cent from 0.9 per cent.

On the growth front, the central bank said: "Looking ahead, the mixed outlook for the global economy will continue to weigh on the external-oriented sectors while the domestic-oriented sectors should stay broadly resilient. The 2015 growth forecast for the Singapore economy remains at 2 to 4 per cent."

DBS economist Irvin Seah told BT that MAS's policy decision - to reduce the crawl rate of the band, as opposed to adjusting its mid-point or widening the band entirely - is "the mildest of all policy options".

"Anything else would have been too drastic, and could have given the wrong signal to the market. The last thing you'd want to do is to inject more volatility . . . We're not seeing significant negative shocks on growth, and inflation has been lower than expected. So the modest easing in monetary policy is appropriate," said Mr Seah.

The last time MAS eased monetary policy was in October 2011. Prior to Wednesday, it had stuck to its policy stance - in place since April 2012 - of a "modest and gradual" appreciation of the Singapore dollar, with no change to its slope, width, and level at which it is centred.

The central bank's latest monetary policy statement caught private-sector economists by surprise, since these are normally delivered only in April and October each year.

"The MAS certainly surprised with an unscheduled policy announcement - an exceptional move - but it was the timing, not the nature of the move that was unexpected," said Mizuho economist Vishnu Varathan. Economists have in recent weeks flagged the small but rising probability of MAS easing in April.

Explaining the surprise announcement, an MAS spokesman said: "We have always maintained the flexibility to conduct policy reviews in between the scheduled April and October cycles. "This arrangement recognises that the Singapore economy is very open and that significant shocks in the external environment can have a sustained impact on the domestic growth and inflation outlook. When needed, off-cycle announcements of policy changes or a reaffirmation of the prevailing policy will be released."

Economists noted that Singapore has now joined several other economies in easing policy this month - Canada, Denmark, and India have cut interest rates, while the European Central Bank has announced quantitative easing plans.

While a minority see room for further easing at the next monetary policy review, most economists do not see this as their base case.

Said OCBC economist Selena Ling: "I think the hurdle rate for further changes in April has increased significantly after today's move, barring a further catastrophic event like a global financial crisis or a SARS-type induced recession."

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