Monetary Policy Statements
Published Date: 14 October 2019

MAS Monetary Policy Statement - October 2019

14 October 2019

INTRODUCTION

1.   In its April 2019 Monetary Policy Statement, MAS maintained the rate of appreciation of the S$NEER policy band. There was also no change to the width of the policy band or the level at which it was centred. This policy stance was assessed to be appropriate, given contained inflationary pressures and a narrowing of the positive output gap.

Chart 1
S$ Nominal Effective Exchange Rate (S$NEER)

 

2.   Over the last six months, the S$NEER has fluctuated within the upper half of the policy band, reflecting shifts in global risk sentiment and capital inflows into Singapore. The three-month S$ SIBOR edged up from 1.9% in end-April 2019 to 2.0% in end-June, before falling back to 1.9% in August, where it has remained as at end-September. 

OUTLOOK

3.   Growth in the Singapore economy has slowed over the first three quarters of the year. It is expected to pick up modestly in 2020, although this projection is subject to considerable uncertainty in the external environment. Core inflation has come in lower than anticipated in recent months, and will remain subdued in the year ahead.

Growth Backdrop

4.   According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy grew by 0.1% year-on-year in Q3 2019, similar to the preceding quarter. In the last six months, the drag on GDP growth exerted by the manufacturing sector has intensified, reflecting the ongoing downturn in the global electronics cycle as well as the pullback in investment spending, caused in part by the uncertainty in US-China relations. In comparison, activity in the services sectors continued to expand, supported mainly by finance & insurance and business services. The construction sector also remained on a recovery path, and grew for the third consecutive quarter in Q3.  

5.   Global economic growth is expected to slow discernibly in 2019 compared to the previous two years, and should stabilise in 2020 barring further shocks. Growth had eased more significantly in Q2 2019 as the cumulative effect of the tariffs and elevated policy uncertainty took a heavier toll on manufacturing and trade. There are nascent signs that the downturn could spill over into domestic demand in some of Singapore’s major trading partners in the quarters ahead, even as macroeconomic policy conditions in these economies have turned more accommodative.

6.   Against this global backdrop, the weakness in electronics production and its supporting industries in Singapore is likely to persist over the near term. At the same time, the finance & insurance and information & communications services sectors should continue to expand, underpinned by domestic demand in the region and ongoing digitalisation-related investments. Within the domestic-oriented sectors, the outlook for the retail industry has dimmed but growth in education, health & social services is expected to stay resilient. The construction sector should also recover further in the year ahead, given the strong pipeline of public infrastructure projects.  

7.   On the whole, Singapore’s GDP growth is projected to come in at around the mid-point of the 01% forecast range in 2019 and improve modestly in 2020. The output gap has turned slightly negative and this is expected to persist into 2020, which will keep inflationary pressures muted.

Inflation Trends and Outlook

8.   MAS Core Inflation, which excludes costs of accommodation and private road transport, fell significantly to an average of 0.8% year-on-year in July–August 2019, from 1.4% in H1. Part of this decline was anticipated, reflecting falling costs of electricity & gas, and the dissipation of the effect of previous water price increases. However, retail and services inflation came in lower than expected. CPI-All Items inflation eased by a smaller extent over the same period, from 0.6% to 0.4%, as higher private road transport costs and a slower decline in imputed rentals on owner-occupied accommodation partially offset the moderation in core inflation.  

9.   In the quarters ahead, external sources of inflation are likely to be benign, amid weak demand conditions, and generally well-supplied food and oil commodity markets. However, oil prices could be volatile in the near term, reflecting geopolitical risks. On the domestic front, labour market conditions are softening as firms become more cautious about hiring. This would lower wage growth in 2019 and 2020 compared to last year. At the same time, non-labour costs such as retail rents should stay subdued. Meanwhile, the extent to which businesses can pass on accumulated costs to consumers would be constrained by poorer consumer sentiment and greater market competition.  

10.  As for the non-core components of the CPI, the negative contribution of imputed rentals to headline inflation should gradually dissipate in the coming months. However, private road transport costs are unlikely to increase significantly, as weakening sentiment and wider availability of alternative modes of transport weigh on the demand for cars.  

11.  MAS Core Inflation is expected to come in at the lower end of the 1–2% range in 2019, and average 0.5–1.5% in 2020. Meanwhile, CPI-All Items inflation is projected to be around 0.5% this year and average 0.5–1.5% in 2020.    

MONETARY POLICY

12.  Singapore’s GDP growth should pick up modestly in 2020, but the level of output will remain below potential. Consequently, inflationary pressures should be muted. MAS Core Inflation is likely to remain below its historical average over the next few quarters before rising gradually over the medium term.  

13.  MAS will therefore reduce slightly the rate of appreciation of the S$NEER policy band. There will be no change to the width of the policy band and the level at which it is centred. This measured adjustment to the policy stance is consistent with medium-term price stability, given the current economic outlook. MAS will continue to closely monitor economic developments and is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly. 

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