Singapore’s Monetary Policy: A Delicate Balancing Act
As the world waits with bated breath for the Monetary Authority of Singapore’s (MAS) policy review on Friday, economists are divided on whether the central bank will loosen its monetary policy or maintain the status quo. The decision hangs in the balance, influenced by factors such as inflation, economic growth, and the uncertainty surrounding US President Donald Trump’s policies in his second term.
A Tale of Two Expectations
A Reuters poll of 12 analysts reveals a split opinion, with six expecting the MAS to ease its currency-based monetary policy to reflect the easing inflation and stronger-than-expected economic growth in 2024. The other six anticipate no change in policy settings, citing the need for caution in the face of global uncertainties.
The MAS’s Prudent Approach
The MAS has not altered its policy since October 2022, when it tightened its grip on the economy for the fifth consecutive time. This cautious approach is understandable, given the central bank’s desire to assess the implications of Trump’s policies, which may only become clear in the second quarter. As Jonathan Koh, Asia economist at Standard Chartered bank, notes, “The MAS may want to assess the implications of policies from the Trump administration…before making any moves.”
Singapore’s Economic Resilience
Singapore’s economy has shown remarkable resilience, with growth surprising on the upside in 2024 at 4% in advance estimates. This, combined with a benign inflation outlook, gives the MAS the space to wait and assess the global environment more thoroughly. As Lee Yen Nee, a risk analyst at Fitch Solutions unit BMI, observes, “Singapore’s economy is in a sweet spot, allowing the MAS to take a wait-and-see approach.”
A Global Perspective
Central banks around the world are adopting a gradual and cautious approach to monetary policy. The Federal Reserve, for instance, lowered rates in December but is expected to hold policy steady this month due to inflation worries sparked by Trump’s policies. The European Central Bank has also signaled a cautious approach, citing prevailing uncertainties.
The Singapore Dollar Nominal Effective Exchange Rate (S$NEER)
Unlike other central banks, the MAS manages monetary policy through the S$NEER, which allows the local dollar to rise or fall against the currencies of its main trading partners within an undisclosed trading band. The MAS adjusts policy via three levers: the slope, mid-point, and width of the policy band.
Room for Easing?
Maybank economist Chua Hak Bin believes there is room for the central bank to ease policy, given the more benign inflation outlook. He forecasts a gentler appreciation in the slope of the S$NEER band, expecting core and headline inflation to fall further in early 2025.
The Road Ahead
As the MAS prepares to make its policy announcement, all eyes will be on the central bank’s next move. Bank of America analysts expect the MAS to leave policy unchanged, but with a dovish steer, before easing at the next scheduled review in April. With Singapore’s economy often seen as a bellwether for global growth, the world will be watching closely to see how the MAS navigates the complex landscape of monetary policy.
Leave a Reply