The Monetary Authority of Singapore (MAS) has maintained its monetary policy stance – in line with expectations from market watchers – at its half-yearly review on Oct 14.

This neutral position comes after two consecutive rounds of easing - with the first being in its Oct 2019 review and the second coming in this year’s April review. It comes as the economy is tipped to recover in 2021, despite the weak underlying momentum, MAS explains.

What a neutral stance means is that the central bank has made no change to the width of the band in which Singapore dollar nominal effective exchange rate (S$NEER) is allowed to float.

At the same time, the slope of the band – which indicates its rate of appreciation – and mid-point have been left untouched. With this, it is maintaining a zero percent per annum rate of appreciation of the policy band. 

This “accommodative policy stance will remain appropriate for some time,” as core inflation is expected to stay low, the MAS notes in its October policy statement.

Core inflation – which gauges price increments to sectors other than accommodation and private transport -  is slated to come in between-0.5% and 0% this year, before rebounding to average around 0% – 1% in 2021. This metric is a gauge considered in MAS’ monetary policy decision.

Meanwhile, headline or all-items inflation – which measures the total level of inflation in the economy – is similarly tipped to fall between -0.5% and 0% this year before edging up to -0.5% to 0.5% next year.

Aside from this, the central bank says its latest stance will “complement fiscal policy efforts to mitigate the economic impact of Covid-19 and ensure price stability over the medium term”.

The latest decision comes as Singapore’s economy shrank by 7% year-on-year in 3Q2020 ended September, according to advance estimates from the Ministry of Trade and Industry (MTI). 

See: Singapore's GDP remains in the red with 7% slump in 3Q2020: MTI

The government body is expecting the republic’s full-year growth to plunge between 5% and 7% this year, and record “above trend growth” in 2021 due to the effects of the low base in 2020.

“The negative output gap will narrow as most sectors recoup their pre-COVID levels by the end of next year. However, activity in travel-related services will still be short of pre-pandemic levels,” MAS observes.

“Overall, the tone is basically status quo with a tinge of dovishness out into 2021, when a clearer assessment of the global and domestic economic recovery prospects and inflationary outlook may warrant a reconsideration of the currently accommodative monetary policy stance,” says Selena Ling, who heads the treasury research and strategy division of OCBC Bank.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye share similar sentiments. The duo point out MAS’ caution that “the economic scarring inflicted by the deep global recession” may cause a drag on external demand for the year ahead.

“The MAS sounded cautious on its outlook for the recovery, stating that the sequential growth in 4Q2020 will likely slow,” they add in their flash note.