Markets might do well to prepare for Singapore’s central bank to follow up this month’s surprise easing with another policy move, analysts say, suggesting a one-off currency devaluation as a possibility in the event the city state’s economy deteriorates further.
Singapore’s trade-reliant economy has come under severe strain over the past two years in the face of a global downturn in demand, crunching exports and leaving its manufacturing sector grappling with losses.
The anaemic growth and low inflation prompted the Monetary Authority of Singapore (MAS) to unexpectedly ease policy this month by removing the “modest and gradual” appreciation path of the Singapore dollar.
Given the uncertain outlook for global growth and a cooling in China – Singapore’s major export market – analysts aren’t ruling out a further easing via a one-off devaluation of the Singapore dollar.
“Should the Singapore economy weaken again, we expect the MAS to be more resolute and aggressive in weakening the Singapore dollar,” said Raymond Lim, head of Asian bonds for Amundi in Singapore.
The MAS manages policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed policy band based on its nominal effective exchange rate (NEER).
It can adjust policy by changing the band’s slope, the centre, or the width.
The MAS has eased policy three times in 15 months in an effort to reanimate growth. On April 14 it reduced the slope to zero percent for the first time since the global financial crisis.
The easings have come amid persistent deflationary pressures. Singapore’s all-items consumer price index has been falling on a year-on-year basis since November 2014.
The next MAS policy announcement is expected in October.
Some market participants say that MAS could put the Singapore dollar on a sustained depreciation path, meaning adopting a negative slope for the policy band. All the same, the hurdle for such a policy action is seen as very high, and analysts say it would be an unprecedented move.
Moreover, a negative slope could give speculators a green light to sell the currency and dull the allure of Singaporean assets, so re-centering the policy band lower – a one-off currency devaluation – is seen as more plausible.
Given that Singapore is a major financial centre, “the hurdle for a negative slope is extremely high,” said Desmond Soon, co-head of investment management, Asia ex-Japan for Western Asset Management.
One complication is that further easing could heighten bearish views against the Singapore dollar and trigger a rise in domestic interest rates as investors seek compensation for holding a weakening currency.
The upshot may be that monetary policy has gone as far as it should, said Manu Bhaskaran, CEO of Centennial Asia Advisors.
“Should the economy weaken further, my own view is that fiscal policy and changes to macro-prudential/administrative policies should be the focus,” Bhaskaran said.