Caught flat-footed: What's the real reason behind the MAS' unexpected policy shift?

The oil crash is a key culprit.

The Monetary Authority of Singapore (MAS) unveiled a surprise monetary policy shift at an unscheduled meeting yesterday, catching the market by surprise.

The MAS decided to reduce the slope of the policy band with no change to its width and the level at which it is centred. It has also revised its inflation forecasts for 2015 wth CPI-All Items inflation now projected to register at -0.5–0.5%, and core inflation expected to hover at 0.5–1.5% this year.

Analysts note that the last time the central bank altered policy at an unscheduled meeting was almost 14 years ago in October 2001, amid the ensuing recession brought about by the dot-com bubble.

“The growth outlook in 2015, while modest, is clearly still some way from the recessionary environment of 2001—thus we think the decision to move policy between meetings underscores the degree to which the central bank has been surprised by the inflation dynamic,” stated a report by Ben Shatil, regional Asia economist at JPMorgan.

He noted that the surprise move suggests that the central bank has recognized that the core inflation outlook is both more benign than previously assessed and was becoming increasingly inconsistent with the previous policy stance.

This sentiment is echoed by HSBC Economist Joseph Incalcaterra, who wrote that inflationary concerns probably pushed the MAS to ease its hawkish stance ahead of schedule.

“This surprise decision was due to the decline in energy prices in recent months, which has moderated core CPI and offsets other inflationary concerns. Although our forecasts for core CPI and growth did not suggest the MAS would change its policy stance so soon, the rapid decline in oil prices has seemingly changed the calculus of the forward-looking central bank,” he stated.