At its latest semi-annual monetary policy meeting on April 14, the Monetary Authority of Singapore (MAS), Singapore’s de-facto central bank, announced it was easing the slope of the Singapore dollar nominal effective exchange rate (S$NEER – the SGD’s value against a basket of currencies), from a 0.5% appreciation path to a 0% path. This is the third easing by the MAS in the current cycle, reflecting slower economic growth and muted domestic inflation.
Given the open nature of the Singapore economy, the MAS prefers to control the currency rather than interest rates. It manages the S$NEER by adjusting the center-point, trading bandwidth and slope (Fig 1). Over the last few years the MAS kept the S$NEER on a “modest and gradual” appreciation path to help combat higher core inflation. However, in January 2015 it surprised the market by easing the slope by 1% to 1.5%. This was followed by another 1% reduction to the slope at the October 2015 meeting.
Rationale for policy easing: Core CPI weaker than expected
Singapore’s economic growth is slowing. Advanced 1Q 2016 GDP printed at 0% quarter-over-quarter (q/q) as a recovery in manufacturing failed to offset weaker services sector growth (Fig 2a). Retail sales, Purchasing Managers Index (PMI) and industrial production (IP) all remained soft. Meanwhile, headline inflation has been negative for 16 consecutive months and core inflation (the measure preferred by MAS) remains at the bottom of the target band (Fig 2b).
The MAS policy move was triggered by an acknowledgement that core CPI will likely remain weaker than previously expected due to lower oil prices, a reduction in labor market tightening and weaker consumer sentiment. The MAS stated that it was not pursuing a policy of depreciation, but simply removing its appreciation bias.
Market Implications: SGD yields likely to trend higher
Since the start of the year the SGD has strengthened vs. the USD; however this is mainly driven by the general weakness of the USD. The SGD did weaken by 1% vs. the USD immediately after the MAS announcement and a weaker SGD should push domestic yields higher. Both the Singapore Treasury bill (SITB) and Singapore government bond (SIGB) yields, as well as swap yields, moved higher following the MAS decision. We expect SGD yields to trend higher and remain volatile for the foreseeable future.
 The latest MAS semi-annual monetary policy meeting took place on April 14, 2016. Source: http://www.mas.gov.sg website; data as of May 10, 2016.
 Bloomberg; data as of April 14, 2016