Monetary Authority of Singapore Monetary Policy Statement for April 2020

The Monetary Authority of Singapore released its Monetary Policy Statement for April 2020. Golden Finance compiled it as follows:

introduce

1. In its October 2019 Monetary Policy Statement, the Monetary Authority of Singapore slightly reduced the appreciation rate of the Singapore dollar nominal effective exchange rate index (S$NEER), but the policy width and center level remained unchanged. The Monetary Authority of Singapore's measured adjustment to the policy stance is also considered appropriate amid subdued inflationary pressures.

2. Between October 2019 and late January 2020, the SGD’s NEER hovered near the upper limit of the policy range due to the weakness of the US dollar. Since then, the SGD’s NEER has declined as inflation has fallen and economic growth has fallen sharply, and its current level is slightly below the median of the policy range.

3. During this period, the Singapore dollar-based SIBOR (three-month) fell from 1.8% in October 2019 to around 1.0% at the end of March 2020, following the decline in the US dollar LIBOR.

Views & Insights

4. The novel coronavirus has exacerbated the contraction of economic activity in Singapore and around the world, leading to supply chain disruptions, travel restrictions in many countries, and a sudden drop in demand. In 2020, Singapore's economy will enter a recession, with GDP growth expected to be -4% to -1%. As a result, deflationary pressures are likely to expand further, while prices of some imported goods may rise due to production and transportation disruptions. Therefore, the Monetary Authority of Singapore is lowering its 2020 forecast range for the Monetary Authority of Singapore's core inflation rate and the Consumer Price Index for All Items (CPI-All Items) to -1 to 0%.

Growth Background and Outlook

5. According to advance estimates released by the Singapore Ministry of Trade and Industry on March 26, Singapore's economy contracted by 2.2% year-on-year in the first quarter of 2020, after growing by 1.0% in the previous quarter. Meanwhile, Singapore's GDP grew by 0.6% in the fourth quarter of 2019, but fell sharply by 10.6% after quarterly seasonal adjustment.

6. The outbreak of the coronavirus in and outside Singapore has put pressure on broader economic activities, with tourism-related industries such as aviation and tourism being the hardest hit. Consumer-facing sectors have also been severely affected by social distancing measures and heightened uncertainty. Construction activity also declined in the first quarter of 2020, partly due to disruptions in the inflow of construction workers and raw materials. In addition, Singapore's manufacturing industry shrank for the fourth consecutive quarter, with most segments performing weakly except for the biomedical and precision engineering industries.

7. Looking ahead, given that economic activities in most of Singapore's major trading partners have been severely affected, global GDP growth is expected to stagnate or even shrink in the first half of 2020. Although China shows signs of returning to normal, the ongoing wave of COVID-19 outbreaks will continue to suppress global economic growth in the first half of this year and beyond. Although fiscal, monetary and regulatory support in many major economies will try to mitigate the economic impact, it is unlikely to change this weak outlook. Overall, uncertainty remains, and the recovery of the global economy will depend on the development of the COVID-19 epidemic and the effectiveness of policy responses.

8. Against this backdrop, Singapore's economy is expected to shrink in 2020. Until the COVID-19 outbreak is effectively contained globally and in Singapore, tourism-related and consumer-facing industries will continue to be affected. In addition, trade-related industry growth will also be affected by falling external demand and supply chain disruptions, while modern services such as finance, insurance, information and communications will also be affected by the overall slowdown in business activities and investment.

9. Currently, Singapore’s GDP growth is expected to be -4 to -1%, which will lead to a significant widening of the negative output gap. The weakness of Singapore’s domestic factor market is also causing deflationary pressure on the economy.

Inflation Trends and Outlook

10. The MAS Core Inflation rate, which excludes accommodation and private road transport costs, declined to 0.6% in the second half of 2019 and averaged 0.1% from January to February 2020. This was due to lower prices for retail goods and a series of measures taken by the government to reduce the cost of pre-school education and healthcare. During the same period, the inflation rate of the Singapore All Price Index rose slightly to 0.6%, reflecting a larger increase in private road transport costs and a recovery in the imputed rent of owner-occupied housing.

11. In the context of the global recession, external sources of inflation may weaken in the short term, especially the benchmark oil price fell sharply in March and is expected to remain low for a long time. However, the supply chain disruptions caused by the measures taken worldwide to contain the new coronavirus epidemic may put temporary upward pressure on imported food prices. Domestically, as companies reduce recruitment, the labor market may show some slack, and the unemployment rate of residents is expected to rise and wage growth will slow down. At the same time, non-labor costs such as retail rents will also remain at a low level. Weak labor market conditions and weak consumer confidence will curb cost pressures and will also be passed on to consumer prices to a certain extent.

12. Within the non-core components of the consumer price index, rents will remain roughly flat due to reduced housing demand and a reduction in the inflow of overseas workers. Car prices are likely to remain roughly unchanged as households are more cautious about large financial expenditures.

13. Given these factors, the MAS core inflation rate and the CPI all-item inflation rate are expected to average around -1% to 0% in 2020.

Monetary Policy

14. Singapore's economy will contract in 2020. After an abrupt decline in the level of economic activity, GDP growth will eventually recover, but there is great uncertainty about the depth and duration of this recession. In the near and medium term, the Monetary Authority of Singapore's core inflation rate is likely to remain below its historical average.

15. As macroeconomic conditions deteriorated and expectations about the outlook weakened, the Singapore dollar's nominal effective exchange rate index has depreciated to just below the mid-point of the policy range.

16. The Monetary Authority of Singapore will adopt a zero appreciation rate in the policy band, starting from the current level of the Singapore dollar nominal effective exchange rate index. The width of the policy band will remain unchanged. Therefore, this policy decision maintains the Singapore dollar nominal effective exchange rate index at the current level, thereby providing stability to the trade-weighted exchange rate.

17. This stable monetary policy stance also reflects the role of fiscal policy in mitigating the impact of the COVID-19 epidemic on the economy. On March 26, Singapore's Deputy Prime Minister and Finance Minister delivered a supplementary budget statement for 2020 in Parliament, announcing the launch of assistance measures worth more than S$48 billion. Together with the S$6.4 billion allocated in last month's fiscal budget statement, a total of nearly S$55 billion was allocated to help Singaporeans cope with the COVID-19 epidemic. The supplementary budget statement was named the "Resilience Budget", which will help companies retain jobs, skills, know-how and capabilities. At the same time, the monetary market operations of the Monetary Authority of Singapore will also provide sufficient liquidity to the financial system, and monetary policy will serve as a supplement to ensure medium-term price stability.

18. The Monetary Authority of Singapore will continue to remain vigilant to developments in the economy and financial markets and stand ready to curb excessive volatility in the Singapore dollar exchange rate.