April 9, 2015 / 4:27 AM / 5 years ago

Singapore central bank may ease policy further to counter slowing growth

SINGAPORE (Reuters) - Singapore’s central bank could loosen monetary policy for a second time this year on Tuesday, but analysts are divided over the magnitude of any easing as authorities contend with slowing growth, a pick up in core inflation and risks of fund outflows.

Office workers walk to the train station during evening rush hour in the financial district of Singapore March 9, 2015. REUTERS/Edgar Su

It’s a delicate balancing act for the Monetary Authority of Singapore (MAS) when it meets for its bi-annual review, with the start of the U.S. Federal Reserve’s tightening cycle expected later this year adding another layer of uncertainty.

On the whole, given slowing growth and benign headline inflation, a further easing in policy is seen as the most likely outcome, according to a majority of 25 economists and currency analysts polled by Reuters.

Singapore’s central bank targets the exchange rate for policy settings instead of interest rates since trade flows dwarf the tiny city-state’s economy. It lets the Singapore dollar rise or fall against the currencies of its main trading partners within a secret trading band based on its nominal effective exchange rate (NEER).

Twelve of the 25 economists polled expect the MAS to lower the mid-point of its currency band next week for the first time since a similar move in April 2009.

Of the remaining 13, six see a widening of the Singapore dollar’s policy band as their base scenario.

Some economists and analysts see the band-widening as a defacto easing since it would allow for more downside for the currency versus the present band - a welcome boost for the trade-reliant economy.

“The market would see it that way,” said Westpac’s senior FX strategist Jonathan Cavenagh in Singapore, when asked if the band-widening is regarded as an easing.

“It allows greater SGD NEER downside, if we see a stronger USD theme re-emerge,” said Cavenagh, who expects the MAS to ease its policy by either band-widening or re-centering, or both.

In January, MAS surprised markets by reducing the slope of its policy band for the Singapore dollar in response to “a significant shift” lower in domestic inflation and slowing growth.


Singapore economy is forecast to have grown just 0.5 percent in the first quarter from the previous three months on an annualized and seasonally adjusted basis, a Reuters poll showed, slowing sharply from 4.9 percent quarterly growth in October-December period.

Headline inflation in February slowed for a fourth-consecutive month, the longest slide in more than five years. Industrial production continued to disappoint in February, while manufacturing activity contracted in March for a fourth straight month.

DBS analysts said that “given the economy’s unusual mix of low growth, no inflation and a tight labor market,” a re-centering of the band lower is the “most sensible option.”

Others, however, doubt MAS would re-center the band lower, noting that while the economy is slowing core inflation - which the central bank watches closely - has ticked up to 1.3 percent in February, from 1.0 percent in January.

“I don’t think they see an overwhelming possibility of adverse shocks that would warrant a mid-point shift lower,” said Vishnu Varathan, senior economist for Mizuho Bank.

Moreover, the Singapore dollar has stabilized over recent weeks from a steep fall amid cooling expectations of imminent U.S. interest rate hikes, lessening the need for the central bank to defend the currency band, economists and investors said.

Some analysts warned that additional stimulus could have the reverse effect of putting more pressure on the economy.

“Further easing will stoke more outflows which lift interest rates further,” said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.

The benchmark three-month interest rate, which is used to set to floating-rate mortgage, rose on Thursday to 1.02705 percent, the highest since December 2008.

Additional reporting by Saeed Azhar; Editing by Shri Navaratnam

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