MAS likely to slightly reduce slope of S$NEER policy band amid economic slowdown, says Scotiabank

The Monetary Authority of Singapore (MAS) is expected to slightly reduce the slope (i.e. the annual rate of appreciation) of its S$NEER policy band to 0.5 percent from current 1.0 percent, when holing its second semi-annual policy meeting in mid-October, according to the latest research report from Scotiabank.

Singapore’s newspaper The Straits Times reported on Sunday that the city-state could downgrade its current 2019 economic growth forecast of 1.5-2.5 percent in August, citing the Ministry of Trade and Industry (MTI).

It could be attributed to a global economic slowdown. Earlier on July 16, the IMF said it has trimmed its 2019 economic growth estimate for Singapore to 2.0 percent from the May prediction of 2.3 percent, following its discussions with Singapore officials that concluded on May 14, the report added.

The Singaporean economy unexpectedly contracted 3.4 percent q/q in the second quarter, with non-oil domestic exports tumbling 17.3 percent y/y in June. In addition, South Korea’s exports fell 13.6 percent in the first 20 days of July from a year earlier, while Taiwan’s export orders dropped 4.5 percent y/y in June. Both have casted a shadow on global trade outlook in the coming months.

Meanwhile, MAS core inflation will likely remain in a range of 1-2 percent the rest of the year. The June core inflation due Tuesday could ease a bit further from 1.3 percent y/y the previous month.

"In our view, the S$NEER index will likely head for the centreline of the S$NEER policy band going forward. In the meantime, an annual appreciation of 0.5 percent in the S$NEER would be able to ensure Singapore’s medium-term price stability particularly if major central banks decide to expand their balance sheets once again," Scotiabank further commented in the report.