Why did the MAS suddenly ease monetary policy?

Analysts weigh in on the unexpected move.

The Monetary Authority of Singapore took the market by surprise when it decided to flatten the slope of its policy band in its April Monetary Policy Statement.

Singapore had only previously adopted a zero slope in times of recession. Analysts note that the central bank’s move is a response to expectations that inflation will stay lower for longer.
Joseph Incalcaterra, economist, HSBC:

The policy outcome is a surprise, not only because the MAS eased policy despite consensus and HSBC expectations for policy to remain on hold, but because in previous easing cycles, the MAS would only implement a flat slope alongside a technical recession. In fact, growth over the past two quarters averaged 3.1% q-o-q saar, which is in line with trend growth. The 1-3% growth forecast for this year was maintained, but the MAS implied the output gap is negative, allowing for a more tempered inflation view.

Today's decision is a turning point for the MAS. Although the central bank recently downgraded its view on labour market tightness and wages, in the MPS it signalled a fundamental change in its view on core CPI over the longer term, and now expects core inflation to average "slightly below 2%" over the medium term, compared to previous expectations for core CPI to return to the long-term average.

We think this is a dovish shift that opens the door for further easing if needed, in particular a downward re-centering, which is a more powerful policy tool. The MAS will remain data dependent.

Philip Wee, senior currency strategist, DBS:

In line with our expectations, the Monetary Authority of Singapore (MAS) flattened the slope of the SGD nominal effective exchange rate (NEER) policy band for a third time since Jan 2015. Effectively, the band is no longer on a modest and gradual appreciation path. Moving to a zero appreciation path means a shift to a neutral stance.

The MAS made clear that this was not a policy to depreciate the SGD. The exchange rate policy is used to manage inflation. With headline CPI inflation expected to stay negative territory for a second year in 2016, the authority does not see core inflation above 2% over the medium term. In fact, the rise in core inflation its sees this year is now expected to be more gradual than previously thought. Domestically, the unemployment rate may rise slightly alongside the gradual rise in redundancies.

Selena Ling, Head of Treasury and Research, OCBC

Looking in the rear mirror, MAS noted that the average level of the S$NEER over the last six months as a whole has been unchanged compared to the previous six months. Both headline and inflation are also expected to tread a more subdued trajectory - MAS core inflation is now anticipated to rise over the course of 2016 at a milder pace than earlier expected and the pass through of business costs to consumer prices will be constrained by the sluggish growth environment. 

MAS now tips medium-term core inflation to average slightly below 2%, but clarified that the move to set the appreciation rate for the S$NEER to zero percent effective today is not a policy to depreciate the currency.

The 3-, 5- and 10-year core inflation averaged 1.3%, 1.7% and 2.0% yoy respectively. Nonetheless, there was a kneejerk reaction for USDSGD higher from around the 1.35 handle to the 1.36 handle this morning. Note the last shift to a neutral slope was back in Oct08 during the Lehman crisis and lasted till Apr10, with a recentering lower in Apr09.