14 October 2020

INTRODUCTION

1.   In its April 2020 Monetary Policy Statement (MPS), MAS set the rate of appreciation of the S$NEER policy band at zero percent per annum, starting at the then-prevailing level of the S$NEER. There was no change to the width of the policy band. This policy stance was assessed to be appropriate given the deterioration in economic conditions and weaker inflation outlook, and aimed to complement fiscal, liquidity and financial policies in supporting the economy through the COVID-19 downturn.

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

2.   The S$NEER had fallen sharply in Q1 2020. Since the MPS on 30 March, it has hovered slightly above the mid-point of the new policy band. The relative stability of the S$NEER has reflected the strengthening of the S$ against the US$, offset by its weakening against a number of regional currencies. The three-month S$ SIBOR fell from 1.0% at end-March to 0.4% in early October, alongside the decline in the US$ LIBOR. 

OUTLOOK

3.  Singapore’s GDP picked up in Q3 2020 after its sharp contraction in the previous quarter. However, beyond the immediate rebound, GDP growth momentum is likely to be modest against a sluggish external backdrop, persistent weakness in some domestic services and limited recovery in the travel-relatedTravel-related has been defined to comprise the air transport, accommodation and arts, entertainment & recreation industries. sector. Nevertheless, barring a renewed worsening of the course of the COVID-19 pandemic, the Singapore economy is expected to expand in 2021, following the recession this year. Core inflation will remain low at 0–1% next year.

Growth Backdrop and Outlook

4.   According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy expanded by 7.9% on a quarter-on-quarter seasonally-adjusted basis in Q3 2020, after a 13.2% decline in Q2. Compared to a year ago, GDP fell by 7.0% in Q3, moderating from the 13.3% contraction in the preceding quarter.

5.   The sequential turnaround in Q3 largely reflected a resumption in domestic economic activity as circuit breaker measures were eased and policy stimulus took effect. The hardest-hit consumer-facing services and construction sector rebounded, while the manufacturing sector reverted to positive growth on the back of a sustained increase in the global demand for semiconductors and strong expansion in petrochemicals output.

6.   Likewise, activity in Singapore’s major trading partners saw a significant recovery in Q3 2020 as economies reopened. However, the pace of expansion is expected to moderate in the quarters ahead. A resurgence in infections in some countries has led to localised lockdowns. Heightened uncertainty over the course of the pandemic, the extent of future fiscal policy support, and tensions in US-China relations will also weigh on the global growth outlook.

7.   Amid still cautious external demand and continued restrictions on cross-border travel, sequential growth in the Singapore economy is expected to slow in Q4 this year and remain modest in 2021. The initial uptick in consumer-facing services is likely to fade given soft labour market conditions and lingering public health concerns, while the industries that did well in 2020, such as pharmaceuticals, could also moderate in the year ahead. The travel-related sector will face prolonged headwinds.

8.   The Singapore economy is forecast to contract by 5–7% this year, and record above-trend growth for 2021 due to the effects of the low base in 2020. The negative output gap will narrow as most sectors recoup their pre-COVID levels by the end of next year. However, activity in travel-related services will still be short of pre-pandemic levels.

9.   While advanced manufacturing, ICT and digital financial services have attracted heathy investments even amid the pandemic, the economic scarring inflicted by the deep global recession in 2020 will weigh on external demand conditions in the next year or so.

Inflation Trends and Outlook

10.  MAS Core Inflation, which excludes the costs of accommodation and private road transport, stayed low, averaging −0.3% year-on-year in July–August 2020, slightly more pronounced than the −0.2% recorded in Q2. Although domestic disinflationary pressures moderated following the reopening of the economy in June, this was offset by lower oil prices which passed through to electricity and gas costs. Imported food inflation also eased, dampening non-cooked food inflation, which has declined from its peak in Q2. CPI-All Items inflation showed more moderate disinflation at −0.4% compared to −0.7% in Q2, as private road transport costs fell at a slower pace in July–August.

11.  In the quarters ahead, external inflation is likely to be low, given weak demand conditions in key commodity markets and the persistence of negative output gaps in Singapore’s major trading partners. On the domestic front, cost pressures are expected to stay subdued. The resident unemployment rate rose to 4.5% in August and is likely to remain elevated. The accumulated slack in the labour market will weigh on wage growth. Nevertheless, the disinflationary effects of government subsidies introduced this year will fade, while demand for some domestic services would also gradually pick up. Consequently, core inflation is forecast to turn mildly positive in 2021.

12.  Meanwhile, accommodation costs are expected to fall, in part due to the decline in foreign employment. Private transport costs should rise modestly amid a continued reduction in the supply of COEs.

13.  All in, both MAS Core Inflation and CPI-All Items inflation are forecast to come in between −0.5 and 0% in 2020. In 2021, core inflation will average 0–1%, while headline inflation is projected to be between −0.5 and 0.5%.

MONETARY POLICY

14.  The Singapore economy is expected to see a recovery in 2021, alongside receding disinflation risk. However, the underlying growth momentum will be weak, and the negative output gap will only narrow slowly in the year ahead. MAS Core Inflation will rise gradually and turn positive in 2021, but remain well below its long-term average.

15.  MAS will therefore maintain a zero percent per annum rate of appreciation of the policy band. The width of the policy band and the level at which it is centred will be unchanged.

16.  As core inflation is expected to stay low, MAS assesses that an accommodative policy stance will remain appropriate for some time. This will complement fiscal policy efforts to mitigate the economic impact of COVID-19 and ensure price stability over the medium term.

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Related:

Past Monetary Policy Decisions