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MAS expected to keep monetary policy unchanged in upcoming review, says BNP Paribas

Amala Balakrishner
Amala Balakrishner10/9/2020 10:19 PM GMT+08  • 3 min read
MAS expected to keep monetary policy unchanged in upcoming review, says BNP Paribas
"Since March, SGD has traded stronger in line with global trading partners,” say BNP Paribas analysts.
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French international bank BNP Paribas reckons Singapore’s central bank is likely to keep its monetary policy unchanged at its next meeting scheduled on Oct 14.

This is as the Monetary Authority of Singapore (MAS) had just reduced the slope of its S$NEER (Singapore Dollar Nominal Effective Exchange Rate) to zero, and re-centred the bands down by 100 basis points in its last policy review in March 2020, note Marcus Loh and Chandresh Jain from the bank’s Emerging Markets Asia team.

This process effectively weakens the Singapore dollar.

“The easing of both of its monetary policy parameters at the same time was a response to the unprecedented Covid-19 shock,” note the duo.

“Since the March MAS decision, the Singapore Dollar has traded stronger in line with global trading partners, as the S$NEER has generally held steady in a tight 50-80 basis point range above the new midpoint,” they add.

Loh is a Foreign Exchange Local Markets Strategist while Jain is a Rates Strategist.

Their prediction is based on the notion that the worst appears to be over in the republic’s economic activity which saw GDP plunge 13.2% year-on-year and an eye-popping 42.9% on a month-on-month basis in 2Q2020 ended June.

Since then, external demand has shown signs improvement with Non-oil domestic exports (NODX) increasing by 7.7% on year in August while factory output was up by 13.7%.

Aside from this, “prices have been more stable in Singapore than elsewhere in Asia with the core inflation standing at -0.3% year-on-year in August,” observe Loh and Jain.

Core inflation – which gauges price increments to sectors other than accommodation and private transport – is a tool used by the MAS when adjusting its monetary policy stance.

Meanwhile, “the hurdle for easing remains particularly high at this stage,” mull Loh and Jain.

“A negative slope for the S$NEER policy bands or consecutive downward re-centering may risk rapid outflows and financial stability concerns,” they explain.

To this end, Loh and Jain expect fiscal stimulus – in the form of the government’s unprecedented budget packages for the year that amount to nearly $100 billion – to do the heavy lifting.

“This unprecedented fiscal impulse and effective targeted measures have suppressed unemployment somewhat, with Q2 unemployment at 2.8% relatively low by both global and historical standards,” they stress, noting that this allows monetary policy to continue to play more of a supportive role.

See also: Monetary policy plays second fiddle to fiscal measures

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