Singapore recession risk raises chance of policy easing

PHOTO: The Straits Times

SINGAPORE - The growing risk of a recession in Singapore has raised the prospects of an off-cycle easing in policy, although for now the consensus among economists is for the central bank to sit tight in the hope the economy sparks to life.

Ten out of 15 economists polled by Reuters said their base prediction was for monetary policy to remain unchanged at the next review in April, 2017, similar to the no-change stance seen at last week's meeting.

However, after the city state's economy contracted sharply in the third quarter, with its services sector in recession and manufacturers hit by weak global demand, many analysts are hedging their bets.

Four expect the Monetary Authority of Singapore to provide more stimulus, while one saw a 50-50 per cent possibility. And, of the ten in the "no change" camp, four said the chances of further stimulus were rising.

More to the point, underscoring the uncertainty around Singapore's growth outlook, eight of the 15 analysts saw some chance of an off-cycle move. "We see the risk of easing, especially if economic conditions deteriorate further," said Weiwen Ng, an economist for ANZ in Singapore.

ANZ expects the Monetary Authority of Singapore (MAS) to stand pat in April with a 40 per cent chance of easing by pushing the centre of the currency band 1 per cent lower.

The MAS manages monetary policy by changes to the exchange rate, rather than interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners based on its nominal effective exchange rate (NEER) because trade flows dwarf the city state's economy.

"Re-centering" would be the most likely form of easing the central bank would take, analysts say. In theory, the MAS could also change the width or the slope of the currency band, but a wider band would also allow for a stronger currency, while setting the Singapore dollar on a path of continued depreciation can be challenging as investors may want to dump it in one go.


Last week the MAS held policy steady despite a surprising economic contraction, and said the neutral policy stance will be needed for an "extended period to ensure medium-term price stability."

Analysts say the central bank, which said it will continue to closely monitor economic developments, is giving itself wiggle room in case it needs to act fast.

"That is a kind of description which suggests that they are giving themselves room to act if things get worse," said Michael Wan, economist at Credit Suisse in Singapore, seeing 50 per cent possibility of an off-cycle easing.

The MAS eased monetary policy twice last year, once in an unscheduled policy review in January 2015.

Most economists, however, say the central bank may need to save its ammunition for any external shocks, while some others expect Singapore could turn to fiscal stimulus to help spur growth.

The government is expected to announce next year's budget in the first quarter, before MAS' April meeting. "If fiscal measures are heavy lifting, the response from monetary side could be more measured and more calibrated," ANZ's Ng said.