Singapore Eases Monetary Policy as Growth Sputters

From the previous three months, GDP grew 0.1 percent, defying analysts prediction for another quarter-on-quarter contraction, which would have pushed the economy into a technical recession.

The city-state bucked all qualms of analysts pointing towards an impending technical recession, albeit extremely narrowly, as its economy avoided two successive quarters of decline.

SINGAPORE-Singapore became the latest Asian nation to take policy action to support its sputtering economy as China’s slowdown casts an increasingly large shadow on growth prospects in the region.

Singapore’s central bank is poised to ease monetary policy for the second time in 2015 in an effort to revive dwindling growth, economists predict. “There will be no change to the width of the policy band and the level at which it is centred”, the central bank said in its half-yearly monetary policy statement. Singapore’s export-dependent economy is vulnerable to swings in global trade demand, and its performance has reflected the regional fallout from China’s economic deceleration in recent quarters.

The Monetary Authority of Singapore, which manages the economy through guiding thecurrency rather than setting interest rates, will boost stimulus when it meets Wednesday, according to 16 of 25 economists surveyed by Bloomberg.

Earlier in January, the MAS caught markets by surprise by reducing the pace of the Singapore dollar’s appreciation against the currency basket in an off-cycle move, but left monetary policy unchanged when it met in April.

“MAS will therefore continue with the policy of a modest and gradual appreciation of the S$NEER policy band”.

Despite the decision to ease policy at its meeting, it appears that the announcement undershot market expectations with the Singapore dollar rallying against the United States dollar in the minutes following the release. Advance GDP estimates for 3Q15 show that growth was literally flat at 0.1% (QoQ saar), which translates into a modest year-on-year expansion of 1.4% (see Table).

However, since July, the S$NEER has weakened and largely fluctuated in the lower half of the policy band. With an economy facing the risk of a technical recession and full-year inflation expected to be negative, currency appreciation becomes a hard policy to maintain.

“[With] commodities having a resurgence recently, the medium-term outlook for inflation may be looking up”, Singapore-based Aw added. However, most of the analysts had predicted that the central bank would lower the midpoint of the band.