On Friday, the Monetary Authority of Singapore (MAS) adjusted its monetary policy, signaling a shift towards easing amidst low inflation rates and modest economic growth, following which Capital Economics analysts anticipated an additional policy relaxation in the forthcoming quarters.
The MAS, which manages monetary policy through the nominal effective exchange rate (S$NEER) against a diversified currency basket, had maintained a consistent policy stance since April 2023 after a period of aggressive tightening that began in October 2021.
Today's decision involved a slight reduction in the slope of the S$NEER policy band, with the width and midpoint remaining unaltered. This move aligned with expectations Capital Economics had since October and was also anticipated by the majority of analysts surveyed by Bloomberg before the meeting.
The central bank described its approach as "measured" and consistent with the strategy of a "modest and gradual appreciation path" for the trade-weighted exchange rate. The MAS expressed a position of having effectively managed inflation, suggesting confidence in the ongoing stability of underlying price pressures within the Singaporean economy.
A significant factor influencing the MAS's comfort with a reduced pace of currency appreciation is the notable decrease in Singapore's inflation. Core inflation was reported at 1.8% year-on-year in December, with a seasonally adjusted three-month annualized rate of 1.0% during the latter half of the previous year.
Capital Economics posits that with a projected downturn in global commodity prices and a cooling of nominal wage growth, inflationary pressures in Singapore are likely to stay subdued.
Additionally, weaker economic growth supports the projection of further monetary easing. The Gross Domestic Product (GDP) growth rate decelerated to a mere 0.1% quarter-on-quarter in the fourth quarter.
Capital Economics suggests that growth will persist below trend in the short term. They also highlight that sluggish global demand will impact Singapore's export-oriented economy, while slowing wage and employment growth could dampen domestic demand in subsequent quarters.
Given the expectations of persistent low inflation and weak growth, coupled with the MAS's optimistic outlook on inflation, Capital Economics forecasts another round of policy easing by the central bank in April.
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