Photographer: Wallace Woon/EPA

Singapore's Central Bank Is Being Put to the Test

Updated on
  • MAS widely expected to keep policy unchanged in meeting Friday
  • Some analysts say economic downturn may force action in 2017

Singapore’s central bank is being put to the test as it navigates a sluggish economy and falling consumer prices with a policy tool focused on the currency.

Unlike most advanced nations, and because of its heavy dependence on exports, Singapore targets the exchange rate instead of interest rates to maintain price stability. Analysts are looking to the Monetary Authority of Singapore on Friday to provide any clues on whether it prefers a weaker local dollar to bolster an economy that probably didn’t grow at all in the third quarter.

Here’s a guide to what to watch for in the central bank’s statement due at 8 a.m. local time.

Adjusting the Slope

The Singapore dollar is managed against an undisclosed basket of currencies of its major trading partners and competitors. The central bank intervenes in the market to keep the rate within an unspecified range 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.

At its last policy decision in April, the central bank eased its stance by saying it won’t seek an appreciation in the exchange rate -- effectively adopting a flat slope that the MAS last used during the 2008 global financial crisis.

Twenty-one out of 24 economists surveyed by Bloomberg expect the MAS to maintain its current stance as the city-state probably avoids an economic recession and keeps its firepower for next year.

“The data is not so strong, and global growth remains weak, but it’s kind of stable,” Masashi Murata, vice president of investor services at Brown Brothers Harriman, said by phone from Tokyo. “I don’t think MAS needs to make a move now.”

Asian central banks from Japan to India are easing policy to support their economies, while bracing for higher interest rates by the U.S. Federal Reserve. While the Fed’s move isn’t a significant factor in the MAS’s decision-making -- because its exchange-rate target is based on a basket of currencies, not a single unit -- the Fed’s action may affect the Singapore dollar, said Dennis Tan, a foreign-exchange strategist with Barclays Plc. in Singapore.

Moving the Band

Even if the MAS keeps policy unchanged, there’s an argument to be made for easing as a way of supporting growth in the face of weak exports.

The central bank could do that by shifting the center of the policy band to a lower level, which would signal the MAS’s preference for a weaker exchange rate. That’s only likely if there’s a significant deterioration in the global economic outlook, said Krystal Tan, an economist with Capital Economics Ltd. in Singapore.

“Doing that would raise fears of a competitive devaluation,” Tan said by phone. “There’s also no need to do so, because the economy is still growing, according to government projections.”

The MAS last re-centered the band in April 2011, lifting it higher in a tightening move that sought to put a lid on inflationary pressures. 

A third policy option for the MAS is a widening of the policy band -- technically a neutral stance intended to allow more volatility in the local dollar -- which is not anticipated by any of the economists surveyed. The central bank has only changed the width four times in the past 15 years, with the last being a narrowing move in April 2012.

For a table showing historical changes to the MAS’s currency policy band, click here

Inflation Outlook

The central bank’s move in April last year was its second unexpected decision in less than 16 months, following an unscheduled policy change in January last year to combat declining consumer prices. Inflation in Singapore has been in negative territory since November 2014, mainly due to lower oil costs and government measures to rein in property values.

The MAS said in July that headline inflation -- which was at minus 0.3 percent in August-- may turn positive this year, while the core measure will probably continue to rise.

Growth Concerns

Singapore’s Ministry of Trade and Industry is also due to release its advanced estimate for third-quarter gross domestic product at 8 a.m. on Friday.

The median estimate of 14 economists surveyed by Bloomberg is for GDP to post zero gains on an annualized basis from the previous three months, when it grew 0.3 percent.

The MAS and government is forecasting expansion of between 1 percent and 2 percent this year, with Deputy Prime Minister Tharman Shanmugaratnam saying last month that growth may come in closer to the lower end of that estimate.