MAS eases monetary policy stance to curb SGD volatility

The NEER’s slope will be flattened.

The Monetary Authority of Singapore (MAS) surprised the market this morning with an announcement to flatten the slope of its appreciating Singapore dollar nominal effective exchange rate (SGD NEER) policy band.

The decision, which came less than three months ahead of its next policy review in April, will allow the USD to rise at a slower pace against the SGD vs its major trading partners, especially those in the advanced economies.

According to DBS, the last time the slope was flattened was in October 2011, when the SGD also witnessed sharp volatility in the global markets from broad-based USD strength against a weak EUR environment.

“Back then, the SGD NEER also fell from the upper to the lower half of its policy band. Back then, the slope of the policy band was halved to 1% a year from the 2%. We expect it will be the same this time around. According to our model, this would put the top side of the USD/SGD band at around 1.3565 this morning,” DBS stated. 

The central bank has also slashed its inflation forecasts. Headline CPI inflation forecast for 2015 was lowered to between -0.5% and 0.5% from 0.5-1.5% previously, while the outlook for MAS core inflation was brought lower to 0.5-1.5% from 2-3% previously.

“Imported inflationary pressures are receding, with global oil prices likely to stay subdued this year. While domestic cost pressures will remain, the pass-through to consumer prices is expected to be moderate,” the MAS noted in its announcement.