Current Policy Considerations Amidst Brexit Uncertainty for the Economy By Reuters

By Masayuki Kitano and Marius Zaharia

SINGAPORE – The head of Singapore’s central bank stated on Monday that the current monetary policy is well-suited to the prevailing economic conditions. A significant change to this policy would only occur in the event of a substantial deterioration in the global economy or a notable shift in the inflation outlook.

The Monetary Authority of Singapore (MAS) anticipates that headline inflation will become positive soon, while core inflation is projected to approach the historical average of around 2.0 percent next year, rising from an estimated 1.0 percent this year.

Despite these inflation expectations, economic growth is predicted to remain lackluster, largely due to global economic weaknesses, with the growth forecast for this year still under consideration.

The MAS is particularly vigilant about potential risks stemming from the United Kingdom’s decision to exit the European Union, the ongoing economic recovery in the United States, and the slowdown in China.

"The current stance of monetary policy remains appropriate for overall economic conditions,” said Ravi Menon, the MAS managing director, in the central bank’s annual report. "Unless there is a marked deterioration in the global economy or a significant shift in the inflation outlook, there is no need to change the monetary policy stance."

The MAS manages its monetary policy by adjusting the Singapore dollar’s value against the currencies of its main trading partners within an undisclosed trading band, which is based on its nominal effective exchange rate (NEER). In April, the central bank unexpectedly eased its policy by setting the rate of appreciation of the Singapore dollar’s policy band to zero percent.

Recent data revealed that Singapore’s headline inflation rate fell by a less-than-expected 0.7 percent year-on-year in June, following a drop of 1.6 percent in May.

Concerns over Brexit have sparked anxiety about another hit to the already sluggish global economy. The International Monetary Fund recently revised its global growth forecasts downward for the next two years. The MAS indicated that Singapore’s economy is expected to continue on a modest and uneven growth trajectory, with further uncertainties stemming from developments in the UK and the Eurozone.

The potential fallout from Brexit could lead to increased financial market volatility, affecting global financial intermediation and capital flows, as well as economic growth overall.

Menon noted that the nominal effective exchange rate of the Singapore dollar remains within the policy band, despite recent exchange rate fluctuations. He emphasized that the MAS is prepared to intervene against excessive movements in the trade-weighted dollar.

Additionally, Menon highlighted that Singapore’s banking system remains robust, though non-performing loans rose to 1.7 percent in the first quarter, up from 1.3 percent a year earlier. Banks have set aside provisions exceeding 100 percent of these loans.

The financial sector grew by 5.3 percent last year compared to a 2.0 percent increase in gross domestic product. However, Menon indicated that this year, growth in financial services will align more closely with overall economic growth. The assets managed in Singapore increased by 9 percent last year to S$2.6 trillion.

The MAS reported a profit of S$0.2 billion for the 2015/16 financial year, down from S$0.3 billion the previous year.

On the property market front, the MAS noted a "measured decline" in property prices following a series of cooling measures implemented since 2009. Private residential property prices have fallen by an average of 0.9 percent each quarter for ten consecutive quarters since peaking in the third quarter of 2013. Menon asserted, "It is not time yet to ease the property cooling measures."