After a brief hiatus during which central banks refrained from stimulating their economies by the only way they know how, i.e., devaluing their currency through monetary policy, moments ago Singapore broke ranks when its central bank, the Monetary Authority of Singapore, unexpectedly eased monetary policy and drew a line against further appreciation when it announced that it would move to zero-percent appreciation in its currency.
The MAS also said that width of policy band and the level at which it is centered will be unchanged while adding that the Singapore economy is projected to expand at a more modest pace in 2016 than envisaged in the October policy review,” the central bank said. “Core inflation should also pick up more gradually over the course of 2016 than previously anticipated.”
The decision came as a surprise to economists, as 12 of the 18 polled said they expected no change from the central bank. It also surprised the SGD which proceeded to slide against the dollar following the announcement.
As a reminder, the Singapore central bank eased monetary policy twice last year by reducing the slope of band, while retaining "modest and gradual appreciation" of currency against basket.
Why did the MAS feel compelled to ease further? According to Bloomberg, the reason is that the trade-dependent city-state’s economic growth ground to a halt last quarter.
Growth was stagnant on an annualized basis compared with the fourth quarter, the trade ministry said in a separate report. That was in line with the median forecast of 12 economists surveyed by Bloomberg. The city state’s services sector contracted for the first time since the first quarter of 2015.
"As Asia’s financial hub, Singapore is feeling the effects of the global downturn and China’s weakening economy. "More businesses were shut than opened in December and February, while bank loans have dropped every month since October, the longest period of declines since 2000."
As Bloomberg adds, Citigroup Inc. economist Kit Wei Zheng said in a report last month that the decline in net new businesses for the first time since 2009 signals a possible recession. In the past two decades, the only time that business closures exceeded openings was during contractionary periods in 2009, 2001 and 1995 to 1997, he said.
More economic weakness was revealed when the services industry contracted an annualized 3.8 percent in the first quarter from the previous three months, when it grew 7.7 percent. Manufacturing and construction rebounded strongly in the quarter, expanding 18.2 percent and 10.2 percent respectively
“The key factors we see here are an absence of a significant pickup in the external front,” Weiwen Ng, an economist with Australia & New Zealand Banking Group Ltd., said by phone from Singapore before the data was released. “The rest of the year will be a function of how the global outlook evolves.”
So now that Singapore has confirmed what the IMF warned about this week, namely that in a time of soaring global debt growth remains elusive and the only way to rent it, is to "beggar thy neighbor" with monetary devaluation, just which other more prominent central bank will be the next to ease monetary policy because, you know, "global conditions"?