MAS eases monetary policy 'slightly' in October

Singapore

THE Monetary Authority of Singapore (MAS) has eased monetary policy "slightly" in its half-yearly monetary policy review on Monday, in a move that economists see as leaving the door open for another possible easing in April 2020.

The slope of the Singapore dollar nominal effective exchange rate (S$NEER) band was made less steep, slightly reducing its rate of appreciation. The band's width and the level at which it is centred are unchanged.

"This measured adjustment to the policy stance is consistent with medium-term price stability, given the current economic outlook," said the central bank.

"MAS will continue to closely monitor economic developments and is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly."

The MAS manages the exchange rate against a trade-weighted basket of currencies of major trade partners, with the Singdollar allowed to float within the undisclosed policy band.

The latest move - MAS' first easing in three years - comes after it held policy steady in April this year, which in turn followed two consecutive slight increases in the pace of Singdollar appreciation in 2018.

Most economists - 14 out of 22 surveyed by Bloomberg - had expected a slight lowering of the S$NEER slope prior to Monday, given the country's lacklustre economic performance and continued global headwinds. The rest had expected a more aggressive easing, to a neutral slope.

Explaining the move, MAS said that GDP growth should "pick up modestly" in 2020, "but the level of output will remain below potential".

"Consequently, inflationary pressures should be muted," it added. It expects core inflation to remain below its historical average over the next few quarters before rising gradually over the medium term.

"Core inflation has come in lower than anticipated in recent months, and will remain subdued in the year ahead," said the MAS.

It expects core inflation to come in at the "lower end" of the 1 and 2 per cent forecast range for 2019, and average 0.5 to 1.5 per cent in 2020.

This marks a softening in rhetoric, from the previous expectation for 2019 core inflation to be in the "lower half" of the range, said UOB economist Barnabas Gan and head of markets strategy Heng Koon How.

The MAS has also narrowed its projection for the 2019 headline inflation to 0.5 per cent, from the previous range of 0.5 to 1.5 per cent. Headline inflation is expected to average 0.5 to 1.5 per cent in 2020.

Economists widely interpret the latest slight easing as being a 50 basis points reduction in the slope to an estimated 0.5 per cent appreciation per year, from 1 per cent previously.

The MAS has kept the door open for further easing, should the weak growth and inflation outlook "deteriorate significantly", said DBS Group Research FX strategist Philip Wee and rates strategist Eugene Leow.

This room for manoeuvre works both ways, given the MAS projection of a pick-up in growth in 2020 amid uncertainty - with "the potential for positive surprises that could force the MAS to reverse course in 2020 if it eased more aggressively this time", said Barclays analysts Brian Tan, Ashish Agrawal, and Abbas Keshvani.

Their base case is for the MAS to stay on hold in April, with the risks in favour of further easing to neutral.

Also on Monday, advance estimates from the Ministry of Trade and Industry put GDP growth at 0.1 per cent in the third quarter, the same as in the preceding quarter. On a quarter-on-quarter seasonally-adjusted annualised basis, growth was 0.6 per cent, a turnaround from the previous quarter's 2.7 per cent contraction.

Noting that it is rare for the MAS to say that it is monitoring economic developments and stands ready to act, HSBC economists Joseph Incalcaterra, Joey Chew and Yun Liu think the central bank is biased towards further easing in the first half of 2020.

Other clues include the dovish caveat about next year's growth pick-up being "subject to considerable uncertainty", and the forecast for core inflation to remain subdued, they said.

OCBC Bank currency economist Terence Wu noted other dovish language, such as the "softening" labour market conditions, from "firm" in the April statement. For Citi analysts Kit Wei Zheng, Ang Kai Wei, and Gaurav Garg, the dovish statement "could be interpreted as conditional forward guidance towards possible shift to a zero slope April 2020, and hence was likely part of the MAS's communication toolkit to 'steer the NEER' lower within the policy band".

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