The Monetary Authority of Singapore (MAS) is widely expected to loosen its monetary policy on Friday (Jan 24), marking its first easing move in nearly five years. This anticipated decision follows the city-state’s core inflation dipping to 1.8% in December – its lowest level since November 2021 – signaling a cooling economic environment.
Core inflation, which excludes volatile sectors like private transport and accommodation, edged down from 1.9% in November, underscoring a broader moderation in price pressures. Headline inflation, meanwhile, held steady at 1.6%, as declines in core and accommodation inflation were offset by smaller reductions in private transport costs, according to data from the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI).
The annual core inflation for 2024 settled at 2.7%, aligning with the official forecast range of 2.5% to 3%. This contrasts sharply with the higher levels seen in 2023, when core inflation peaked at 4.2% for the year.
Implications of MAS’s Potential Easing
The MAS manages monetary policy primarily through the Singapore dollar nominal effective exchange rate (S$NEER). A shift toward easing typically involves reducing the slope of the policy band, which allows the currency to depreciate slightly. Such a move makes Singapore’s exports more competitive internationally while potentially encouraging economic activity domestically.
Economists anticipate that Friday’s announcement could reflect this approach. The easing policy is largely seen as a response to subdued inflation and moderating wage growth in Singapore. OCBC’s Chief Economist Selena Ling suggests that MAS could lower its forecast range for core inflation to between 1% and 2% for 2025.
Barclays economist Brian Tan points out parallels to 2022 when MAS made similar adjustments at a time of shifting global inflation dynamics. “This is reminiscent of prior instances when MAS acted pre-emptively,” he said.
Implications of MAS Easing Monetary Policy
Weaker Singapore Dollar: Easing monetary policy usually involves a reduction in the slope of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band. This would allow the Singapore dollar to weaken against a basket of currencies, potentially boosting export competitiveness but making imports more expensive.
Lower Borrowing Costs: A dovish stance could lead to lower interest rates, making borrowing cheaper for businesses and consumers. This supports domestic consumption and investment, helping to cushion any economic slowdown.
Boost to Equities:
Lower interest rates tend to favor growth stocks, particularly in sectors like technology, real estate, and finance.
Companies with high debt levels could see reduced financial burdens, improving profitability.
Market Sentiment: An easing signal could spark short-term optimism in the stock market, particularly among investors betting on a more accommodative economic environment. However, if the move is perceived as a reaction to significant economic weakness, it may temper enthusiasm.
Stock Market Impact
Export-Driven Sectors: A weaker SGD would benefit exporters, such as manufacturing and logistics firms, by making their goods and services cheaper abroad.
Banking Stocks: Lower interest rates could compress net interest margins for banks, potentially pressuring profitability in the financial sector.
Consumer Stocks: Enhanced purchasing power and increased discretionary spending could boost retail and consumer goods companies.
Real Estate Investment Trusts (REITs): Lower rates typically benefit REITs, as they reduce borrowing costs and enhance the attractiveness of dividend yields relative to bonds.
Strategic Outlook
Investors should watch for Friday’s MAS announcement for confirmation of policy easing. Portfolio adjustments might include increasing exposure to growth sectors, export-oriented stocks, and REITs, while being cautious about banking stocks that could face margin pressures.
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