Will MAS easing make matters worse for Singapore economy?

It does nothing with the weak demand.

While the city-state's shrinking economy calls for policy easing, Monetary Authority of Singapore (MAS)'s unique foreign exchange-based framework may just add fuel to the fire.

According to a report by BNP Paribas, easing policy via a re-centering of the SGD nominal effective exchange rate lower may boost export earnings but does little to address the underlying problem of weak final demand.

"Domestic borrowing costs may rise as foreign investors seek greater yield compensation to offset lost potential FX gains against a backdrop of reliance on wholesale funding by the domestic banking system," the report said.

More so, MAS easing may further deepen the demand rut and amplify the pincer movement on margins as the Federal Reserve System's tightening may likely increase debt service for businesses and highly-indebted households.

"As a result, the best course of action for the MAS to achieve policy objectives is to leave settings unchanged. It may not reverse the growth situation, but it should avert a deeper downturn," BNP stressed.

The report took note that despite the respectable growth of the city-state's real GDP, its nominal GDP in Q2 has been the worst in the region.