MAS Adjusts Monetary Policy

On Friday, the Monetary Authority of Singapore (MAS) altered its monetary policy, indicating a shift towards easing given low inflation rates and modest economic growth. Analysts at Capital Economics expect further policy relaxation in the coming quarters.

The MAS, responsible for monetary policy through the nominal effective exchange rate (S$NEER) against a diverse currency basket, had maintained its policy stance since April 2023, following aggressive tightening that began in October 2021.

The recent decision involved a modest reduction in the slope of the S$NEER policy band, while the width and midpoint remained unchanged. This action aligned with expectations set by Capital Economics since October and was anticipated by most analysts surveyed by Bloomberg prior to the meeting.

The central bank characterized its approach as “measured” and consistent with a strategy for a “modest and gradual appreciation path” for the trade-weighted exchange rate. The MAS indicated confidence in managing inflation effectively, suggesting stability in underlying price pressures within the Singaporean economy.

A key factor contributing to the MAS’s comfort with a reduced pace of currency appreciation is Singapore’s significant decrease in inflation. Core inflation was reported at 1.8% year-on-year in December, with a seasonally adjusted three-month annualized rate of 1.0% during the latter half of last year.

Capital Economics believes that with a predicted decline in global commodity prices and a cooling of nominal wage growth, inflationary pressures in Singapore will likely remain subdued.

Furthermore, weaker economic growth supports the expectation of further monetary easing, as the Gross Domestic Product (GDP) growth rate slowed to just 0.1% quarter-on-quarter in the fourth quarter.

Capital Economics projects that growth will continue to be below trend in the short term, highlighting that sluggish global demand will affect Singapore’s export-driven economy, while slowing wage and employment growth might suppress domestic demand in future quarters.

Given the anticipated persistent low inflation and weak growth, along with the MAS’s positive outlook on inflation, Capital Economics forecasts another round of policy easing by the central bank in April.

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