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Singapore eases monetary policy sharply as virus heralds deep recession

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03/30/2020 | 01:46am EDT
A view of the Monetary Authority of Singapore's headquarters in Singapore

Singapore's central bank aggressively eased monetary policy on Monday as the bellwether economy braced for deflation and a deep recession this year due to the coronavirus pandemic.

The Southeast Asian nation is among the world's most open economies and seen as a gauge of the health of the global trade. Last week, it posted a sharp decline in first quarter gross domestic product and slashed growth projections.

The Monetary Authority of Singapore (MAS) manages policy through exchange rate settings, rather than interest rates, letting the local dollar rise or fall against currencies of its main trading partners within an undisclosed band.

The widely-expected easing on Monday was the most aggressive since the 2009 financial crisis, flattening the band's rate of increase and effectively shifting its centre lower. It also comes only days after the government unveiled a large fiscal package to soften the outbreak's hit to the economy.

While the MAS move follows drastic steps by other central banks, it was still not as bold as some in the market had expected, which pushed the local currency <SGD=D3> up slightly.

"We have heard the government talk about the downturn in pretty dire terms, so there was no mistaking that pretty aggressive easing would be required," Barclays' economist Brian Tan said, adding he had been expecting a bigger move.

The MAS adjusts its policy via three levers: the slope, mid-point and width of its Singapore policy band, known as the Nominal Effective Exchange Rate, or S$NEER.

The central bank on Monday said it would adopt a zero percent annual appreciation rate for its policy band, starting at the S$NEER's prevailing level, which is currently just below the band's mid-point.

Analysts said this amounted to a downwards adjustment of the first two settings, the slope and mid-point, but left the width unchanged.

All nine economists in a Reuters survey this month expected the central bank to ease as policymakers worldwide step up efforts to limit the economic damage from the fast spreading virus.

Most global central banks, including the U.S. Federal Reserve, have cut interest rates to cushion the hit to businesses from the outbreak, while many have also resorted to printing money to prevent their economies from slipping into recession.

The Southeast Asian shipping, travel and finance hub is bracing for the worst recession in its 55-year history and last week lowered its 2020 GDP forecast range to -4% to -1% after a sharp contraction in the first quarter.

While Singapore's early successful efforts to contain the coronavirus won it praise globally, a recent jump in infections to over 800 has raised some concerns about the local spread.

The central bank on Monday also lowered its official outlook for headline and core inflation to -1% to zero percent for 2020.

The MAS said its new policy settings provided "stability" to the exchange rate but added fiscal policy will be the main tool to mitigate the economic impact of the pandemic.

The city-state has spent billions in virus-related relief for businesses and households already this year, equivalent to almost 11% of its GDP.

Capital Economics said the move highlighted the limits of central bank policy in weathering the downturn and that further loosening of monetary settings was unlikely in the months ahead.

But others said the central bank still had room to ease when it next meets in October, if not before.

The Singapore dollar <SGD=D3>, which has already fallen nearly 6% this year, jumped as much as 0.5% against the dollar after the announcement and was up around 0.2% at 0424 GMT.

"The overall focus has been to emphasise a message of stability in the Singapore dollar," said Moh Siong Sim, currency analyst at the Bank of Singapore. "In the past, wherever there's such a move, it's taken as a prelude to a series of easings, but I think this time around the focus is more on the fiscal policy to cushion the blow and the exchange rate is more to release the pressure somewhat."

By John Geddie and Joe Brock

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