S’pore central bank put to test amid slowing economy

SINGAPORE — The Monetary Authority of Singapore (MAS) is being put to the test as it navigates a sluggish economy and falling consumer prices with a policy tool focused on the currency.

Unlike most advanced nations, and because of its heavy dependence on exports, Singapore targets the exchange rate instead of interest rates to maintain price stability. Analysts are looking to the central bank today to provide clues on whether it prefers a weaker Singapore dollar to bolster an economy that probably did not grow at all in the third quarter.

Here is a guide to what to watch for in the MAS statement:

The Singapore dollar is managed against an undisclosed basket of currencies of its major trading partners and competitors. The central bank intervenes in the foreign exchange market to keep the rate within an unspecified range and changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the local dollar.

ADJUSTING THE SLOPE, centre OR WIDTH

At its last policy decision in April, the central bank eased its stance by saying it will not seek an appreciation in the exchange rate — effectively flattening the slope of the Singapore dollar that the MAS last used during the 2008 global financial crisis. Of the 24 economists surveyed by Bloomberg, 21 expect the MAS to maintain its current stance as the city-state probably avoids an economic recession and keeps its firepower for next year.

“The data is not so strong and global growth remains weak, but it’s kind of stable. I don’t think MAS needs to make a move now,” said Mr Masashi Murata, vice-president of investor services at Brown Brothers Harriman in Tokyo.

Asian central banks from Japan to India are easing policy to support their economies, while bracing for higher interest rates by the United States Federal Reserve. While the Fed’s move is not a significant factor in the MAS’ decision-making process, the Fed’s action may affect the Singapore dollar, said Mr Dennis Tan, a foreign exchange strategist with Barclays bank in Singapore.

Even if the MAS keeps policy unchanged, there is an argument to be made for easing as a way of supporting growth in the face of weak exports. The central bank could do that by shifting the centre of the policy band to a lower level, which would signal its preference for a weaker exchange rate. That is only likely if there is a significant deterioration in the global economic outlook, said Ms Krystal Tan, an economist with Capital Economics in Singapore. “Doing that would raise fears of a competitive devaluation. There’s also no need to do so, because the economy is still growing, according to Government projections,” she said.

The MAS last re-centred the band in April 2011, lifting it higher in a tightening move that sought to put a lid on inflationary pressures.

A third policy option for the MAS is a widening of the policy band — technically a neutral stance intended to allow more volatility in the local dollar — which is not anticipated by any of the economists surveyed.

The central bank has only changed the width four times in the past 15 years, with the last being a narrowing move in April 2012.

INFLATION OUTLOOK AND GROWTH CONCERNS

The central bank’s easing move in April was its second unexpected decision in less than 16 months, following an unscheduled policy change in January last year to combat declining consumer prices. Inflation in Singapore has been in negative territory since November 2014, mainly due to lower oil costs and Government measures to rein-in property values. The MAS said in July that headline inflation — which was at minus 0.3 per cent in August — may turn positive this year, while the core measure will probably continue to rise.

The Ministry of Trade and Industry will also release its advanced estimate for third-quarter gross domestic product today. The median estimate of 14 economists surveyed by Bloomberg is for GDP to post zero gain on an annualised basis, slowing from the previous quarter when it grew 0.3 per cent.

The MAS and Government are forecasting expansion of between 1 and 2 per cent this year, with Minister for Trade and Industry (Trade) Lim Hng Kiang and Deputy Prime Minister Tharman Shanmugaratnam saying in recent days that growth is likely to be at the lower end of that range. BLOOMBERG