News: MAS eases monetary policy amid Covid-19 pandemic

Mar 31, 2020

With the economy battered by the Covid-19 pandemic, the Monetary Authority of Singapore (MAS) eased its monetary policy by reducing the Singapore dollar policy band’s slope to a zero rate of appreciation.

MAS also lowered the midpoint of the policy band, a move it last took during the global financial crisis in 2009, while keeping the width of the policy band unchanged, reported Today Online.

MAS manages monetary policy via exchange rate settings, instead of through interest rates like other central banks do, allowing the Singapore dollar to fall or rise against its main trading partners’ currencies within an undisclosed policy band, also known as the Singapore dollar nominal effective exchange rate (S$NEER).

MAS allows the Singdollar to depreciate or appreciate against this basket of currencies, provided it stays within the band, intervening only when needed.

The central bank’s monetary policy decision would mean the Singdollar will appreciate at a slower rate versus other currencies.

The rate of inflation will also slow, even as prices of some imported items may increase due to supply chain disruptions during the Covid-19 outbreak.

With this, MAS lowered its forecast range for core inflation to -1% and for overall inflation to 0%.

MAS noted that the S$NEER depreciated to slightly below the policy band’s midpoint level due to a deterioration in macroeconomic conditions as well as expectations of a weaker outlook.

“This policy decision hence affirms the present level of the S$NEER, as well as the width and 0% appreciation slope of the policy band going forward, thus providing stability to the trade-weighted exchange rate,” said the central bank in its monetary policy statement on Monday (30 March).

The biannual policy review is typically held in April and October, but was brought forward to March.

The monetary policy’s easing to a neutral stance comes after the lowering of the policy band’s gradient in October 2019.

“This stable monetary policy stance also reflects the primary role of fiscal policy in mitigating the economic impact of Covid-19,” said MAS.

The fiscal measures announced by Deputy Prime Minister Heng Swee Keat in February in his budget statement as well as the recent Resilience Budget, will “help to preserve jobs, skills and firms’ know-how and capabilities”.

“MAS’ money market operations will at the same time provide sufficient liquidity to the financial system. Monetary policy will complement these efforts and ensure price stability over the medium term,” it added.

Singapore’s trade-reliant economy is expected to go on a full-year recession for 2020. In fact, the Trade and Industry Ministry lowered its growth forecast to between -4% and -1%, down from between -0.5% and 1.5%.

This is the ministry’s second downgrade in view of the Covid-19 outbreak’s escalating impact. The virus started in Wuhan, China but has since spread across the globe, with Europe and the United States emerging as the new epicentres of the disease.

Based on preliminary data, Singapore’s gross domestic product (GDP) contracted 2.2% in the first quarter.

“The Singapore economy will contract this year. GDP growth will eventually recover following the abrupt downshift in the level of activity, but there is significant uncertainty over the depth and duration of this recession,” said MAS.

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