Saturday 16 April 2016

MAS eases currency policy, sets appreciation rate of Singdollar to 0% beginning 14 April 2016

MAS eases up on Sing$ rise as outlook dims
Flash estimates show zero per cent growth in Q1 compared with the previous quarter
By Yasmine Yahya, Assistant Business Editor, The Straits Times, 15 Apr 2016

The surprise move by the Monetary Authority of Singapore (MAS) yesterday to halt the appreciation of the Singdollar has underscored the bleak outlook for the economy, which is showing signs of stagnation.

The MAS set the rate of the dollar's appreciation to zero per cent, catching out traders.

The Singdollar slumped the most since August, weakening as much as 1.2 per cent against the US dollar to S$1.3667.

It also dragged down other Asian currencies, as investors worried that the MAS' move might trigger a currency war, with various governments depreciating their currencies to keep their exports competitive.

The MAS last flattened the rate of the Singdollar's appreciation to zero per cent in 2001 during the bust, and again in 2008 during the global financial crisis.

Mizuho senior economist Vishnu Varathan said: "A flattening is not done lightly. While we are not staring down the barrel of a gun, it could be that the MAS sees the economy as being in a 'slow burn' recession."

Indeed, the decision came as flash estimates from the Ministry of Trade and Industry (MTI) showed that the economy expanded 1.8 per cent in the first quarter compared with the same period a year ago, but grew zero per cent when compared with the previous quarter. In its policy statement, the MAS said the future does not look much better, as the outlook for the global economy has dimmed since its last policy review in October.

It estimated that weakening investment and exports will weigh on the US economy, while the euro zone and Japan will be dragged down by strengthening currencies and weak export demand. China's growth is also likely to moderate.

In this context, a relatively weaker currency could make Singapore's exports more attractive to its major trading partners that face subdued growth.

The MTI's flash numbers showed that manufacturing continued to be the main drag in the first quarter, contracting 2 per cent in the three months to March 31 from a year earlier.

Some lift to the local economy came from construction, which expanded 6.2 per cent, and services, which grew 1.9 per cent.

But DBS economist Irvin Seah said the data shows the services sector is losing steam, as it grew just 3.8 per cent compared with the previous quarter, down from a more robust 7.7 per cent between the third and final quarters of last year.

"Historically, if this sector turns, the economy turns along with it. A downward revision of the headline GDP (gross domestic product) growth should not be discounted."

Halt in Singdollar's rise seen only during recession
By Marissa Lee, The Straits Times, 15 Apr 2016

Currency traders and other market watchers were taken by surprise yesterday when the central bank deployed a weapon it had used only when the country was in recession.

The Monetary Authority of Singapore (MAS) announced yesterday that it would stop the Singapore dollar from rising further against a basket of key currencies. Its hand was forced by the prospect of weaker inflation over the coming months - shorthand for saying the economy will grow at an anaemic pace.

Its announcement at 8am yesterday sent the Singdollar diving more than 1 per cent against the greenback before settling at $1.363 to one United States dollar at 8pm, from $1.35 on Wednesday.

Traders recalled that the previous occasions when the MAS flattened the slope of the Singdollar policy band to zero were in October 2008, when the world was in the middle of a global credit meltdown, and in July 2001, following the bust.

Most analysts were expecting the MAS to withhold its monetary bullets until actual data confirmed an economic slowdown. Even more so as Finance Minister Heng Swee Keat had leaned on the side of optimism in his Budget speech just three weeks ago.

Yesterday marked the third time that the central bank has eased monetary policy since January last year. But that has not stopped the Singdollar from rising 3.3 per cent against the greenback this year. Analysts are expecting more volatility, with the economy crossing into uncharted waters.

DBS senior currency strategist Philip Wee said: "In the past, if we had negative inflation, we were in a recession. This is the first time we didn't need a recession to have negative inflation."

The central bank yesterday said it expects headline inflation to remain negative throughout this year. The MAS also lowered its guidance for core inflation to come in within the lower half of the 0.5 per cent to 1.5 per cent forecast range, though it left its official forecast unchanged.

Mr Wee, who had guessed the MAS would go for zero appreciation, said: "We're not bearish, we're not calling for a recession; we just don't think that growth is strong enough to generate inflation."

The MAS said it now expects a more modest pace of growth from the US economy due to weaker investment and exports, even as its labour market strengthens. China's growth will also moderate as its growing services sector is unlikely to offset its faltering industrial activity, the MAS said.

On the domestic front, wage growth is projected to slow further. Oil prices are up but analysts have tired of calling the bottom, and there is no asset inflation.

"To have that kind of inflation (that can sustain a rising Singdollar), you need everyone to go crazy on property again... You need to have the wealth effect," said Mr Wee.

If the MAS chooses to continue on this easing cycle at its next biannual meeting in October, its next step would be to recentre the Singdollar policy band lower, analysts said.

"You tend to require a huge external shock to trigger that recentring policy," said ANZ forex strategist Khoon Goh. "But from what we've seen since this easing cycle began in January last year, it looks like the hurdle for easing isn't as high any more."

Sing$ surprise not a bad idea
By Aaron Low, Deputy Business Editor, The Straits Times, 16 Apr 2016

The central bank's decision to change its exchange rate policy, to one that will involve a zero appreciation of the Singapore dollar, took most economists by surprise.

Many had expected the Monetary Authority of Singapore (MAS) to keep the previous policy of allowing for a modest and gradual appreciation of currency. This outlook was buttressed by the fact that the economy managed to log 1.8 per cent growth in the first three months of the year according to the advance estimates, beating market expectations of 1.6 per cent growth.

So what gives?

This is the first time the MAS has moved to a zero-appreciation stance since 2008 when the financial crisis was raging. It did so as it was clear the country was heading into one of the worst recessions since independence.

This time round, Finance Minister Heng Swee Keat has said that a recession is not on the cards yet, although the growth outlook remains poor.

But growth is not the main reason why it switched to a looser monetary policy on Thursday. A weaker Singdollar has mixed effects on the economy, according to MAS studies. The actual driving force is still inflation, the main target of MAS monetary policy, which is aimed at keeping price levels stable. Headline inflation has been negative for the past 16 months, largely due to falling rents and private car prices. But with a weaker economy, even core inflation, which excludes accommodation and private road transport, has started to trend lower.

The biggest fear is one of deflation - where general prices fall over a sustained period of time. This will, in turn, stymie growth, with people preferring to save rather than spend as their money will be worth more in the future. Foreign central banks have pulled out all the stops to prevent this, including imposing negative interest rates.

Loosening monetary conditions in a disinflationary environment like this is really not a bad idea at all.

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