Policy easing pressures are steadily mounting for MAS

It's tough to defend the SGD.

The Monetary Authority of Singapore (MAS) resolutely held its ground in the wake of broad-based regional currency weakness last week triggered by China’s unexpected decision to devalue the RMB.

Although the central bank has affirmed its policy of a modest and gradual appreciation of the SGD, analysts warn that escalating headwinds might push the central bank into easing policy in October.

“With an economy facing the risk of a technical recession and full-year inflation expected to be negative, currency appreciation becomes a difficult policy to maintain,” said DBS economist Irvin Seah.

Seah noted that according to DBS’ model, the SGD NEER is already easing towards the floor of its appreciating policy band amid heightened market volatility.

“If this continues, the MAS would have two choices: spend reserves defending the band or relax the appreciation policy,” Seah said.

But spending reserves becomes difficult in light of potential capital flight that could result from higher US interest rates and fears of further yuan devaluation.

“All things considered, risks are rising that the MAS eases policy in October,” he noted.