Singapore adopts 2008 crisis policy

Scarabeo 9 was ordered by Frigstad Offshore, a Singapore-based offshore drilling rigs management service company. The falling oil price has hit this key Singaporean sector. Source: Wikimedia

The Singaporean central bank has eased policy after growth stalled in the first quarter, reducing economic expectations and triggering the biggest currency fall dollar in eight months.

Singapore has been hampered with weak exports, depressed foreign demand and low inflation which have seen decision makers scrambling to restore momentum through aggressive easing.

In its third policy easing in 15 months, the Monetary Authority of Singapore (MAS) said it would set the rate of appreciation of the republic’s dollar NEER policy band at 0 per cent, starting on Thursday, and shift to a neutral policy stance.

“It seems that Singapore is using both fiscal policy and the exchange rate to address the situation,” said Weiwen Ng, an economist at Australia and New Zealand Banking Group. “We may not be at the end of the easing cycle.”

It is the first time the MAS has moved to ‘neutral’ since the 2008 global financial crisis, underscoring declining world growth that has destabilised asset markets in recent months and prompted central banks in Europe, Japan and China to step up policy support.

The MAS, which manages monetary policy by changing the exchange rate rather than interest rates because trade flows dwarf the US$290-billion economy, previously maintained “modest and gradual” appreciation of the Singapore dollar.

The IMF warned on Tuesday that prolonged slow growth had left the world economy more exposed to negative shocks. It predicted 1.8 per cent expansion for Singapore in 2016, compared with the authorities’ projection of 1 to 3 per cent.

“It’s very interesting and eye-catching that the MAS has gone back to post-global financial crisis settings, and sends a strong message about the weak external environment,” Sean Callow, a currency strategist at Westpac in Sydney, said.

He added: “As one of the world’s most trade-sensitive economies, Singapore’s concern over a ‘less favourable external environment’ should be noted by [South Korea, Australia and New Zealand].”

The US Federal Reserve has moved to signal a more measured approach to rate increases.

The MAS eased monetary policy twice last year, once in an unscheduled policy review in January last year.

“The Singapore economy is projected to expand at a more modest pace in 2016 than envisaged in the October policy review,” the MAS announced. “Core Inflation will rise over the course of this year at a milder pace than earlier anticipated.”

Joseph Incalcaterra, economist at HSBC in Hong Kong, said the central bank’s subdued view of inflation could lead to more policy easing.

“The MAS will remain data dependent,” he added.

This week’s data showed Singapore’s economy failed to post growth in the first quarter from the previous three months, follow 2 per cent growth in 2015, the weakest in six years.

Singapore’s manufacturing sector has been hammered by falling global oil prices, which have reduced demand for oil rigs built by Singapore’s large rig industry.

A softer Singapore dollar could put upward pressure on interest rates as investors seek higher yields to compensate for holding the weakening currency.

“The big picture is that we expect Singapore’s economy to grow at a fairly sluggish rate of just 2 per cent this year and next,” said Daniel Martin, senior economist at Capital Economics.

“In the short-term growth will be held back by rising local interest rates, which track the Fed funds rate closely.”