The Monetary Authority of Singapore (MAS) will reduce the slope of its Singapore dollar nominal effective exchange rate (S$NEER) policy band “slightly”, while there will be no change to the width of the band or at the level at which it is centred. This is the first time the central bank has eased its policy since March 2020.
The decision, which was announced in MAS’s monetary policy statement (MPS) on Jan 24, comes after the Singapore dollar (SGD) eased against the US dollar (USD) amid the latter’s broad-based strength. That said, the SGD continued to appreciate against other currencies within the S$NEER basket within the same period. The S$NEER remains within the gradually rising policy band, MAS adds.
Chart: MAS
Lowered inflation projections
The MAS has lowered its core inflation projections for 2025 to 1.0% - 2.0% from 1.5% - 2.5% projected in its October 2024 MPS. This comes as Singapore’s core inflation fell to 1.9% y-o-y in 4Q2024 from 2.7% in 3Q2024, which was more than expected by the central bank. Costs are also expected to remain low for a myriad of reasons including declining global oil prices and “favourable supply conditions” in key food commodity markets, while unit labour cost increases are projected to be lower this year.
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The seasonally adjusted three-month and three-month rate of core inflation stood close to an annualised 1.0% for most of 2H2024. Core inflation excluding the impact from GST hikes is estimated to have dropped below 1.5% y-o-y in 4Q2024, says MAS.
“Overall, the pace of consumer price increases has moderated across a broad range of goods and services, and core inflation is presently low and stable,” it adds.
The central bank also lowered its CPI-All items inflation (or headline inflation) estimates to average between 1.5% - 2.5% in 2025, down from 2.4% in 2024. Inflation for accommodation is expected to slow while private transport inflation is expected to pick up this year.
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Citi Research analyst Kit Wei Zheng says he expected the MAS to update its 2025 inflation forecasts as the central bank and the Ministry of Trade and Industry (MTI) indicated previously that core inflation will "step down" this year. MAS and MTI also expressed that it will update its 2025 core forecasts at the time, which hinted at an "imminent policy shift", Kit noted.
Slower growth momentum
On the whole, Singapore’s growth momentum is expected to slow in 2025 after its outperformance in 2H2024. In 2024, Singapore’s economy grew by 4%, surpassing MTI's forecast of 3.5%, and marking the highest growth since 2021.
In MAS’s view, the level of output is “projected to come in close to the economy’s potential for 2025 as a whole”. Meanwhile, MAS Core Inflation has moderated more quickly than expected and will remain below 2% this year, reflecting the return to low and stable underlying price pressures in the economy.
Analysts say
Ahead of the January MPS, analysts from United Overseas Bank (UOB) and Citi Research predicted that the MAS will reduce its slope, with UOB's Jester Koh and Citi's Kit both predicting a 50 basis point (bps) reduction to 1%.
While Koh said in his note dated Dec 30, 2024, that he "will not be surprised" if the MAS decided to keep its S$NEER parameters due to the uncertainty of US policies, Citi's Kit was quite sure the MAS would have reduced its slope either way. "Should MAS stay on hold in January, this would imply easing has simply been pushed back to April," Kit wrote in his Jan 23 report.
In a Jan 24 note, DBS Group Research economist, Samuel Tse, and foreign exchange (FX) and credit strategist, Chang Wei Liang, said the move to reduce the slope "was not a surprise" as the S$NEER already declined from the top to the mid-point of the policy band before the decision. The estimates were based on DBS's in-house model.
"USD/SGD remained stable around mid-1.35 post-decision. The decision to lower the S$NEER slope aligns with a marked moderation in the pace of inflation, and a rise in global economic uncertainty due to potential trade policy frictions," Tse and Chang note.
