Disinflationary pressures to broaden, but fiscal policy plays main role in Covid-19 crisis: MAS

DISINFLATIONARY pressures will broaden in the economy as the demand shock from the Covid-19 pandemic reverberates, but fiscal policy will play the main role in mitigating the crisis, the Monetary Authority of Singapore (MAS) said in its half-yearly Macroeconomic Review on Tuesday.

Both core and headline inflation are expected to turn negative in 2020 for the first time since 2002. The official forecast has both core and headline inflation coming in at between -1 per cent and 0 per cent this year.

Apart from food prices, all other major components of the MAS core inflation measure - which excludes private road transport and accommodation - are expected to decline this year.

In the coming months, prices are expected to fall for holiday expenses and airfares amid the collapse in travel demand; for discretionary services such as restaurant dining and recreation, with social-distancing measures and a weakened labour market; for healthcare and education due to government support; and electricity and gas, with the global oil price collapse. Increases in domestic and international spare capacity will also put downward pressure on inflation in the near term.

With Singapore's economic outlook depending on the global course of the pandemic, gross domestic product growth could come in below the forecast range of -4 to -1 per cent if downside risks materialise, said the MAS. Such risks include more stringent Covid-19 containment measures in Singapore or other economies, a prolonging of the pandemic, and persistent uncertainty due to the difficulty of completely containing the virus.

Minister for Trade and Industry Chan Chun Sing said in an interview with Bloomberg last week it was "very likely" that growth would come in below the forecast range.

Although wages, rather than employment, will bear the brunt of the crisis in the near term, there will still be a rise in retrenchments and resident unemployment.

In the face of all this, fiscal rather than monetary policy is seen as providing the main response to the crisis, said the MAS.

In its most recent monetary policy statement on March 30, the MAS flattened the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band and lowered it, for a zero per cent per annum rate of appreciation starting at the prevailing level of the S$NEER then.

This is "an appropriate level to prevent a broadening of disinflationary pressures" and is complemented by steps to increase liquidity to the financial system, relax regulatory requirements for banks, and work with the financial industry to ease credit conditions for businesses and households, said the MAS.

"The zero per cent appreciation of the band going forward would also impart a degree of stability to the trade-weighted exchange rate," it added.

Monetary policy is thus complementing other government moves, said the MAS. "Fiscal policy will provide the main contribution to the expansionary macro-policy stance this year while delivering significant short-term relief to households and firms."

Together, monetary, financial, fiscal, and regulatory policies will ease the economic cost of the pandemic and "help prevent a severe, temporary shock from imparting a deeper and longer-lasting imprint on the economy", it added.