Quick takes: Singapore leverages on twin policy levers

THE Monetary Authority of Singapore (MAS) caught the market off-guard on Thursday by flattening the Singapore dollar policy band - shifting to a neutral policy stance of zero per cent appreciation of the S$NEER (Singapore dollar nominal effective exchange rate) band.

The width of the policy band and the level at which it is centred remains unchanged.

Meanwhile, flash estimates by the Ministry of Trade and Industry (MTI) showed that the Singapore economy grew by 1.8 per cent in Q1 compared to a year ago, beating analyst forecasts of 1.6 per cent growth.

Here are some comments from private-sector economists:

ANZ economist Weiwen Ng:

"Singapore is leveraging on the twin policy levers - fiscal and exchange rate - to address the potential downside risks to growth and inflation as well as a deteriorating labour market.

"While core inflation year-to-date has evolved in line with the Monetary Authority of Singapore (MAS) forecast, MAS now expects core inflation to come in at the lower half of the 0.5-1.5 per cent range, barring upside surprises to oil prices.

"The risk of a protracted disinflationary (and potentially deflationary) phase is elevated amid its multi year restructuring with core inflation now likely to average slightly below 2 per cent in the medium term.

"MAS easing to neutral leaves the door open for re-centering later in the year if conditions warrant. There is also room for off-budget measures at a later stage to accommodate any potential economic shocks."

Mizuho economist Vishnu Varathan:

"Two things stood out about MAS's surprise move.

"First, MAS has taken pains to communicate that this is not a policy of SGD depreciation to wisely dispel misconceptions. Fact is, by removing appreciation bias the SGD should in theory be steady against a basket of trade-weighted currencies.

"USD/SGD however jumped from near 1.35-figure to above 1.36 as the S$NEER slipped from around 0.2-0.4 per cent above the policy mid-point to around 0.2-0.4 per cent below.

"Second, MAS has, unusually, taken this step in the absence of an emphatic recession.

"In contrast, the 2001 and 2008 moves to remove "modest and gradual" appreciation coincided with recessions from global crises - the "dot com" followed by SARS for the former, and Global Financial Crisis."

Nomura economists:

"We see some further risk of depreciation in the near-term, but not so much from this mild shift in policy (from +0.5 per cent to 0 per cent annualised appreciation), but from the risk that expectations of further easing this year could increase. As such, we maintain our short S$NEER position given the asymmetry we highlighted previously and as S$NEER is rich within the policy band.

"Some of the main reasons highlighted in the MAS statements for the change include: 1) expectations that the economy will expand at a more modest pace this year relative to expectations in October 2015; 2) increases in core inflation will be milder than previously expected; 3) a reduction in labour market tightness; 4) weaker consumer sentiment.

Overall, we expect MAS FX policy to remain unchanged over the remainder of this year based on recent developments and expectations, but we believe the probability of a change in FX policy (to a re-centering lower) this year is currently around 30 per cent (similar to our view of an ease for today's policy announcement) given the risks to the external sector."