MAS may have more reason to tweak policy after yuan's drop: poll

[SINGAPORE] Singapore's central bank may have more reason to consider adjusting monetary policy settings after China's surprise devaluation triggered a fall in the Singapore dollar, a Reuters poll showed.

Six of 11 analysts in the survey, conducted between Tuesday and Friday, said yuan devaluation could add to the case for the Monetary Authority of Singapore (MAS) to tweak its policy settings.

To be sure, none of the 11 shifted their views toward monetary easing based solely on the Aug 11 yuan devaluation.

The three analysts who expect MAS policy easing in coming months as their base case all held such views even before China's surprise action, which fanned concerns about the health of the world's second-largest economy.

Hirofumi Suzuki, an economist for Sumitomo Mitsui Banking Corp, had previously expected the MAS to ease in October.

The yuan devaluation, however, "will reinforce incentives for the MAS to ease its monetary policy in an inter-meeting period," he said, adding that such easing may even happen this month.

The Singapore dollar closely tracks the yuan because traders think the yuan is included in the undisclosed, trade-weighted currency basket used by the MAS to manage monetary policy.

Some analysts say the Singapore dollar's nominal effective exchange rate (NEER) probably fell to around the bottom of the policy band during the week.

Analysts at Morgan Stanley said yuan devaluation poses risks for MAS policy, adding that a case could be made for lowering the mid-point of the policy band. "While this is not our base case, with further depreciation pressure on the SGD, the MAS would either have to defend the band or allow a one-off adjustment in the band," they said in a research note.

Singapore's monetary policy is focused on the exchange rate rather than interest rates due to the trade-dependent nature of its economy.

The MAS eased policy in January in an off-cycle policy decision. Its next scheduled review is in October.

Another uncertainty is whether spillover effects from a weaker yuan will add to disinflationary pressures in Singapore. Core inflation in June was 0.2 per cent year-on-year, having hit a five-year low of 0.1 per cent in May. "The immediate concern from the CNY devaluation is the lower oil prices and how it will affect Singapore's already low core inflation," said Philip Wee, senior currency economist for DBS Bank, adding that DBS analysts are reviewing their forecast for the MAS to keep policy steady in October.

Singapore's central bank said on Wednesday that its current monetary policy remains appropriate, adding that the Singapore dollar remains within its policy band despite increased market volatility due to China's currency devaluation.

REUTERS