Economists: MAS Easing to Weaken Singdollar, Sharp Decline Unlikely
SINGAPORE: The Monetary Authority of Singapore (MAS) is considering further monetary policy easing due to lingering uncertainties in the country’s economy, economists have suggested. The Singapore dollar is expected to weaken as a consequence, although the decline may not be significant, they added. MAS announced on Friday (Jan 24) that it would “reduce slightly” the slope of its policy band, marking its first policy easing move since March 2020. This decision comes as the central bank foresees contained inflation and slower growth domestically in 2025. Core inflation forecasts for this year have been lowered to a range of 1 to 2 per cent from the previous estimate of 1.5 to 2.5 per cent. Economic growth is expected to be “at a slower pace” of 1 to 3 per cent in 2025, a decrease from the 4 per cent growth reported in the previous year.
How does MAS’ monetary policy work?
The MAS has a unique approach to monetary policy, using the exchange rate as its primary policy tool rather than interest rates, as most central banks do. This is because Singapore is a trade-dependent open economy. The Singdollar nominal effective exchange rate (S$NEER) is managed against a trade-weighted basket of currencies from Singapore’s major trading partners. The MAS allows the S$NEER to fluctuate within a specified band and intervenes by buying or selling Singapore dollars if it moves outside this band. Adjustments to the slope, width, and mid-point of the band are made to control the pace of the local currency’s appreciation or depreciation based on assessed risks to Singapore’s growth and inflation. The slope is the most commonly used tool by MAS to adjust the band, determining the rate at which the Singdollar appreciates. Changes in the mid-point are reserved for drastic situations, and adjustments in width control how much the Singdollar can fluctuate.
WHY NOW?
Economists believe that the recent policy shift by MAS is aimed at providing the economy with a preemptive advantage against potential headwinds. These include uncertainties surrounding global macroeconomic policies, the sustainability of the upturn in the global electronics cycle, and the risk of increased trade frictions following President Donald Trump’s return to the White House. The possibility of a global trade war involving the US, China, the EU, Canada, and other countries could negatively impact Singapore’s economy, which heavily relies on global trade. Subsiding inflation has also created space for MAS to adjust its policies, reflecting a strong conviction in the restoration of price stability in Singapore.
WHAT’S NEXT?
Economists expect MAS to continue easing monetary policy in the coming year, although opinions differ on the timing of the next move. Some analysts suggest that the recent slowdown in economic growth may prompt MAS to ease policy as early as April. The softening global demand and domestic wage growth could further weigh on Singapore’s economy in the near term. Despite the possibility of another policy adjustment, some experts believe that MAS might adopt a wait-and-see approach given the improving core inflation trajectory. The global trend of monetary easing among central banks aims to stimulate economic growth by reducing interest rates.
HOW WILL THE SINGDOLLAR MOVE?
The recent adjustment by MAS to reduce the slope of its policy band indicates a slower pace of appreciation for the Singdollar. A weaker currency typically boosts exports but makes imports more expensive. The market responded modestly to MAS’ move, suggesting that it was largely anticipated. The Singdollar’s value against the US dollar remained stable, indicating a measured response. Despite expectations of further easing, the Singdollar may retain some relative resilience against trade partners if the policy band maintains a non-neutral slope. Experts predict a slight weakening of the Singdollar in the first quarter due to a stronger US dollar but expect it to stabilize throughout the year.
