The Monetary Authority of Singapore (MAS) has finally tightened monetary policy. But this is no ordinary central bank. Its target is not the price of money – interest rates – but the price of its currency via a trade-weighted Singapore exchange rate. It discloses the index value on a weekly basis, but does not reveal the weights, the exact targeted slope of the index, and the band in which they can move.
So what exactly did the MAS decide to do?
It stated: “MAS has therefore decided to increase slightly the slope of the S$NEER [Singapore dollar nominal effective exchange rate] policy band, from zero percent previously. The width of the policy band and the level at which it is centered will be unchanged. This policy stance is consistent with a modest and gradual appreciation path of the S$NEER policy band that will ensure medium-term price stability.”
The MAS is trying to have its cake and eat it too, by having both a competitive currency and low real rates to shelter growth. It is succeeding so far
Before we discuss the implication of such a shift in policy, let’s explain in layman’s terms what the statement essentially says. The MAS is stating that the Singapore dollar will be appreciating gently on a weighted basis, rather than being neutral as previously.
Singapore is a massive current-account-surplus economy (26% of GDP), and thus its structural bias is on an appreciation basis. But a weak global trade environment is causing the central bank to engineer limited appreciation via targeting zero appreciation of the S$NEER via a band.
A more price-competitive Singapore dollar, improving oil prices and global demand in general, and the bottoming out of the local real estate market all support an economic recovery in Singapore, albeit a fragile one.
The advance release of first quarter 2018 numbers shows that Singapore’s GDP grew by 1.4% quarter-on-quarter, a slowdown from 2.1% in the fourth quarter of 2017. On a year-on-year basis, GDP accelerated to 4.3% in Q1 2018, following growth of 3.6% for all of 2017.
By sector, semiconductors were strong, but the marine and offshore engineering industry remains subdued. In services, retail and food services saw some deceleration, suggesting that domestic demand remains fragile. The central bank was upbeat in its statement and expects the recovery to continue. In other words, economic recovery makes the case for the decision to raise the slope of the S$NEER from neutral to allow for some appreciation.
The most important FX cross for Singapore is CNY/SGD, as China is a key trade partner. Although the SGD appreciated versus the USD by 6.3% in the past year, the MAS ensured that it is competitive versus the CNY – by depreciating the SGD against CNY by -2.8% in the past year. The SGD also depreciated versus the ringgit and the euro by 6.4% and 8%, respectively.
In other words, despite a weighted appreciation in the index overall, the SGD is not appreciating versus its key trade partners, which means that the MAS is mindful of bilateral FX competitiveness to ensure that the recovery is not derailed.
There are signs that exports are slowing across the region, including Singapore. This means that the SGD appreciation will be more index-based and key partners such as China, the Eurozone, and Malaysia will still carefully watched.
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