Pull Out Your Protractors: Time for Singapore's Monetary Decision

Singapore's central bank uses a complex mix of policy tools to steer the economy

Aerials Of The Lion City As Gross Domestic Product Contracts Most Since 2012
Photographer: Darren Soh/Bloomberg

As the only advanced economy to use its exchange rate as its main monetary policy tool, Singapore's central bank policy statements tend to be less straightforward than most.

The Monetary Authority of Singapore, which will announce its latest decision on Wednesday, manages the Singapore dollar's exchange rate against an undisclosed basket of currencies from its major trading partners and competitors. It intervenes in the market to keep the rate within an unspecified band and changes the slope, width and center of that band when it wants to adjust the pace of appreciation or depreciation of the local dollar.

Source: DBS Bank Ltd.
Source: DBS Bank Ltd.

Fifteen out of 22 economists surveyed by Bloomberg expect the MAS to ease for a second time this year on Oct. 14 as the economy faces a possible technical recession and continued deflation.

Here are some moves the MAS could make, and what they would mean.

1. Lower the upward slope of the band

Reducing the slope of the band allows slower gains in the currency over time, an option the MAS exercised in January when it joined a wave of global monetary easing. The unscheduled move helped send the local dollar to its weakest level since 2009 against its U.S. counterpart.

While the decision signaled a modest easing, the MAS maintained a ``modest, gradual appreciation'' of the policy band, which is generally understood to mean a tight policy stance.

Lowering the slope again this week would also confirm the Singapore dollar's weakness against currencies of its major trading partners over the past two months. 

2. Move the center of the band lower

Shifting the center of the policy band to a lower level would signal the exchange rate should remain on the weak side in the near future. Re-centering the policy band lower by half a band would be equivalent to a one-off devaluation of 2 percent, DBS Group Holdings Ltd. senior currency economist Philip Wee said in a note on Oct. 6.

The Singapore dollar has fallen about 5 percent against the U.S. dollar this year. It will probably depreciate about 8 percent in total this year to S$1.44 versus the greenback, according to analysts surveyed by Bloomberg, which would be the currency’s worst performance since the Asian financial crisis of 1997.

 3. Widen the band

Increasing the width of the band is technically a neutral stance intended to allow more volatility in the local dollar. However, a Nomura Holdings Inc. survey of clients in September showed 92 out of 100 polled anticipated the Singapore dollar nominal effective exchange rate will weaken at least 0.1 percent immediately if such action was taken.

The MAS may widen the trading band to +/-3 percent from +/-2 percent, mostly driven by an increase in market volatility since China's move to allow the yuan to devalue in August and reinforced by expectations for the Federal Reserve to tighten monetary policy, Westpac Banking Corp. strategist Sean Callow wrote in a note on Friday. 

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