MAS keeps Singdollar policy unchanged on low core inflation outlook

SINGAPORE – Singapore’s central bank is keeping monetary policy steady as it expects core inflation to remain low this year.

As widely expected, the Monetary Authority of Singapore (MAS) left unchanged the Singapore dollar’s rate of appreciation at zero per cent per annum of its policy band, it announced in its latest twice-yearly monetary policy review on Wednesday (April 14).

The width of the policy band and the level at which it is centred will also be unchanged.

It made the decision even as Singapore’s core inflation turned positive in February for the first time in a year. An appreciation of the Singdollar against the currencies of Singapore’s major trading partners will reduce imported inflation and dampen consumer prices.

MAS said prospects for global growth have firmed and should provide support to the ongoing recovery in the Singapore economy.

“Nevertheless, output will still be below potential in 2021. Although MAS core inflation is expected to rise gradually this year from its current low levels, it will remain short of its historical average,” it added.

The Singapore economy grew by 0.2 per cent on a year-on-year basis in the first quarter of 2021, a turnaround from the 2.4 per cent contraction recorded in the previous quarter, according to advance estimates released by the Ministry of Trade and Industry on Wednesday.

Core inflation, which excludes the costs of accommodation and private transport, was 0 per cent in January to February, over the same period a year ago.

It rose from the minus 0.2 per cent in the fourth quarter of last year, mainly due to fading disinflationary effects of government subsidies on healthcare and education services introduced in the first half of 2020.

Overall inflation rose to 0.5 per cent from minus 0.1 per cent over the same period.

MAS expects inflation in Singapore to rise at a more gradual pace in the second half of this year despite “some upside risks to global price pressures”.

“While higher global oil prices will continue to pass through to domestic prices, surplus oil production capacity should cap further large price increases. Lingering negative output gaps in a number of Singapore’s key trading partners should also keep overall imported inflation contained,” it said.

Prices of some goods and services are likely to rise as labour market conditions improve and private consumption recovers, said MAS.

“However, these would be gradual, in line with subdued wage growth as the slack in the labour market will take time to be fully absorbed,” it noted, forecasting that core inflation will come in at 0 to 1 per cent this year.

The authority revised its forecast range for overall inflation this year to 0.5 to 1.5, up from minus 0.5 per cent to 0.5 per cent previously.

MAS’ policy stance on Wednesday was in line with the views of 16 economists polled by Bloomberg. All of them said the central bank would likely refrain from changing any of the three currency band settings.

The central bank uses the Singapore dollar’s nominal effective exchange rate (S$NEER) as its main policy tool rather than interest rates, because Singapore is a small and open economy with a heavy dependence on trade.

The S$NEER is the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies of the nation’s major trading partners. The S$NEER is allowed to float within an unspecified band. Should it go out of this band, MAS steps in by buying or selling Singdollars.

The central bank changes its monetary policy by adjusting the slope, width and midpoint of this band based on assessed risks to the country’s growth and inflation.

MAS took the unprecedented step last April of both lowering the midpoint of its currency band and reducing the slope to zero.

That meant it allowed for a weaker exchange rate to head off deflation and support Singapore’s export-reliant economy as the nation braced for a deep recession.

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