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'Calibrated' monetary easing by MAS to working hand-in-hand with $48 bil Resilience Budget

Amala Balakrishner
Amala Balakrishner • 7 min read
'Calibrated' monetary easing by MAS to working hand-in-hand with $48 bil Resilience Budget
In a one-two punch, Singapore’s central bank last week announced it was easing its exchange-rate based monetary policy.
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SINGAPORE (Apr 3): In a one-two punch, Singapore’s central bank last week announced it was easing its exchange-rate based monetary policy. This comes four days after the government unveiled a $48.4 billion secondary Budget on March 26 to combat the economic impact of the Covid-19 pandemic.

In its latest half-yearly monetary policy review on March 30, the Monetary Authority of Singapore (MAS) said it was reducing the rate of the Singapore dollar’s appreciation to zero, at the prevailing level of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER). This effectively weakens the Singapore dollar through a re-centring of the mid-point of the policy band, while keeping its width unchanged.

As it is, the S$NEER was fluctuating around 0.6% below the mid-point before MAS made the decision. This suggests that the S$NEER had been re-centred 60bps lower (See chart 1).

Chart 1: MAS eases policy to neutral; re-centers lower

“The policy decision affirms the present level of the S$NEER, as well as the width of the 0% appreciation of the policy band going forward, thus providing stability to the trade-weighted exchange rate,” notes MAS. The S$NEER is the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies of Singapore’s key trading partners. Unlike the control of interest rates by other central banks, the S$NEER is the city-state’s main exchange rate policy instrument.

Coming earlier than its typical April announcement, the latest move by MAS is a bid to facilitate economic growth and prevent deflationary pressures. It is the central bank’s second consecutive easing after it reduced the Singapore dollar’s appreciation “slightly” last October. Meanwhile, it is the first time since the 2009 global financial crisis that MAS has lowered the center of the S$NEER policy band.

Fiscal firepower

Although economists say the downward shift of the S$NEER should benefit businesses and banks through better liquidity flows, they note that the “calibrated and non-aggressive” move may require further rounds of policy easing. Till then, the main stimulus to the economy will have to come from fiscal policy.

Maybank Kim Eng’s senior economist Chua Hak Bin says “monetary policy is a blunt instrument and cannot address the financial distress in the hardest-hit sectors”. As such, “fiscal policy and the recent second package can tailor the financial support and channel funds [to ailing sectors],” he adds.

Singapore is not alone in utilising both monetary and fiscal policy tools to fight the ongoingeconomic pandemic. The US Federal Reserve on March 23 extended loans to big and small businesses and is making unlimited purchases of government debt to keep money flowing to companies and households. The Fed’s move serves to create the flow of liquidity in the market and comes just a week after its emergency Federal Funds Rate cut — the second time in March — where it lowered its target range from 0% to 0.25%, from its previous range of 1% to 1.25%.

Across the Atlantic, the Bank of England has cut interest rates to an all-time low of 0.1% and has launched a GBP200 billion ($353 billion) money creation scheme for the purchase of government and corporate bonds.

Closer to home, Malaysia announced a RM250 billion ($82.5 billion) economic stimulus package — constituting 17% of its GDP — to strengthen its economy and protect the welfare of its citizens. The move comes after Bank Negara Malaysia’s (BNM) 100bps cut of the Statutory Reserve Requirement (SRR) — the proportion of deposits banks are required to set aside — to a nine-year low of 2%. Selected banks are also allowed to recognise up to RM1 billion to comply to this SRR requirement. While the SRR cut is used to manage liquidity and not a monetary policy tool, it should release some RM30 billion into the banking system.

Weaker Singdollar

Still, analysts are taken aback by the mildness of the re-centering. For one, the Singapore dollar rose briefly against the greenback shortly after the policy announcement. At 8.02am on March 30, it had strengthened to 1.4217 against the USD, compared to its March 27 close of 1.4268. The currency has since continued to slacken.

Faiz Nagutha, Bank of America’s Asean economist, notes that the SGD appears to have strengthened in reaction to the MAS’s stance. This may have come from the initial confusion on whether a re-centring had taken place or not “as such explicit language was missing from the policy statement,” he points out. Nagutha adds that he was slightly disappointed and surprised by the “dovish” announcement, given the smaller than expected degree of re-centring, absence of forward guidance by MAS such as its preparedness to recalibrate monetary policy if needed, as well as the reliance on fiscal policy to do the heavy lifting.

OCBC’s currency expert Terrence Wu agrees, saying it is a “calibrated decision to emphasise the limited extent of the re-centre and to maintain a sense of stability in the monetary policy stance” as MAS also insists it “stands ready to curb excessive volatility in the S$NEER”.

Vishnu Varathan, Mizhou Bank’s head of economics and strategy, says this implies that an “indiscriminately weaker SGD is neither appropriate nor desired”, especially so with a softening of the labour market, contractions in global economies and the downward spiral of oil prices.

Even so, Deputy Prime Minister Heng Swee Keat says MAS’s action is “absolutely correct”. “But, the firepower for managing this has to be fiscal policy,” he added in an interview with CNBC on March 30.

To be sure, this fiscal policy comes from the government’s two Budget packages. The most recent of this is the $48.4 billion package unveiled as part of the Resilience Budget on March 26, which is designed to protect jobs, help enterprises and strengthen social and economic resilience. Together with the $6.4 billion announced in February, total fiscal aid stands at $55 billion or 11% of Singapore’s GDP.

Inflation and employment rate

Amid a bleak global economic outlook, MAS expects Singapore’s economy to 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” notes the central bank. To this end, MAS has cut core and headline inflation estimates this year to between –1% and 0%, from its previous forecast of 0.5% to 1.5%. The move comes after the consumer price index (CPI) for February came in at –0.5% — the first time in a decade that the index is negative.

In the near to medium term, core inflation, a price gauge excluding private road transport and accommodation costs, is expected to fall below the historical average. This is likely to affect MAS’s next policy stance scheduled for October.

In addition, MAS expects the resident unemployment rate to rise and wage growth to decrease this year. Drawing reference to the unemployment levels of 3.3% during the peak of the 1997/1998 Asian Financial Crisis and the GFC, Maybank Kim Eng’s Chua expects Singapore’s resident unemployment rate to climb to around 3.5% from the current 2.3%, with expected job losses of around 40,000 to 50,000 this year.

Nevertheless, as the number of Covid-19 cases increases daily both in Singapore and abroad, Chua says the lifeline from the Resilience Budget and the monetary easing may only be enough for the next six to nine months. After such time, if Singapore and the world are in a recession, another fiscal package and policy easing may be necessary, he adds.

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