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Why Singapore's central bank is unlikely to make another off-cycle policy move

Monday, January 11, 2016 - 17:42

[SINGAPORE] Singapore's central bank may ease monetary policy outside its half yearly reviews if oil prices fall more sharply or China's economy takes a turn for the worse, but economists say a repeat of last January's surprise easing is unlikely for now.

Eight of nine analysts surveyed by Reuters from Jan 6 to Jan 11 said the Monetary Authority of Singapore (MAS) was not expected to change policy before its next review in April.

The MAS surprised investors last January, when it eased its exchange-rate based policy in an unscheduled statement, saying declining global oil prices had significantly changed the city-state's inflation outlook.

This time, the deflationary impact from sliding oil prices is expected to be less severe.

Brent crude oil prices slid about 23 per cent in the fourth quarter of 2015 compared with a 39 per cent slide in the same period of 2014. "There hasn't been that big shock that kind of requires the MAS to act," said Daniel Martin, an economist for Capital Economics.

That could change if there are clear signs of a further deterioration in China's economic growth momentum, he said. "Our view is that the most recent hard data out of China shows signs of stabilisation, but if we do start to see the opposite...then that would make the MAS much more nervous," Mr Martin said.

The yuan's recent slide has stirred renewed concern about the health of the world's second-largest economy and triggered turmoil in financial markets, but economists do not see this prompting any immediate MAS policy change.

Indeed, the MAS had held off from any off-cycle policy change after China's surprise yuan devaluation in August. "I think they will try to hold out," said Selena Ling, head of treasury and research strategy for OCBC Bank. "We will see. With each bout of volatility, obviously we are testing a little bit on the downside for the (Singapore dollar) NEER." Against a backdrop of low inflation and tepid global growth the MAS also eased policy at a scheduled review in October.

The central bank 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). It can adjust the slope, mid-point or width of the band.

One potential complication for the central bank is that the Singapore dollar NEER may have dropped close to the bottom of the policy band this month, according to some estimates.

The possibility of another off-cycle policy easing seems high, given that the Singapore dollar NEER seems to have slipped close to the bottom of the policy band, said Hirofumi Suzuki, an economist for Sumitomo Mitsui Banking Corporation in Singapore. "In that case, I think they might shift to a policy of zero appreciation," Suzuki said, referring to a possible reduction in the slope of the Singapore dollar NEER policy band.

REUTERS