Monetary policy plays second fiddle to fiscal measures

The Monetary Authority of Singapore (MAS) is expected to leave the Singapore dollar settings unchanged at its next half-yearly review to be announced on Oct 14. In the face of the worst recession on record, economists believe that monetary policies will play second fiddle to fiscal measures in this hard slog to turn the economy around.

In its most recent review in March, MAS — in a one-two punch — paired a zero slope with a downward re-centring of its policy band. Prior to this, the central bank cut the policy to a zero-appreciation flat slope during the global oil price slump in April 2016, only to tighten the band later.

“Monetary policy is a less effective tool to deal with the pandemic recession, and fiscal policy will play the leading role in supporting firms and households,” note Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye. They expect the MAS to maintain its current neutral-bias or zero-appreciation slope of the S$NEER (Singapore Dollar Nominal Effective Exchange Rate) on Oct 14.

“MAS had already made a “double” easing move earlier in March by easing the slope of the S$NEER and re-centring the band. We are not expecting a change in the level, slope or width of the S$NEER band,” they add.

Ong Sin Beng and Arthur Luk from JP Morgan’s Asian emerging markets economic and policy research team agree. “Monetary policy remains focused on price stability [while] fiscal is on growth,” they note, adding that the unprecedented Budget packages announced this year is what is slated to lift Singapore’s ailing economy up.

The three aspects of Singapore’s monetary policy are: its rate of appreciation or slope of the S$NEER band, the width of the band and the level at which it is centred. All three settings are likely to stay put, according to the economists.

However, monetary policy may need to step up if the government tapers off its fiscal stimuli in next year’s Budget and if the resultant downside risks shift towards external demand, caution Citi analysts Kit Wei Zheng and Ang Kai Wei.