Singapore central bank: current policy appropriate, economy faces Brexit uncertainty

By Masayuki Kitano and Marius Zaharia

SINGAPORE (Reuters) – The Singapore central bank’s current monetary policy stance remains appropriate and only a marked worsening in the global economy or significant shift to the inflation outlook would prompt a change, its managing director said on Monday.

The Monetary Authority of Singapore (MAS) expects headline inflation to turn positive in the near future and core inflation was seen closing in on the historical average of around 2.0 percent next year from a likely average of 1.0 percent in 2016.

Economic growth was expected to remain sluggish, however, reflecting global weakness, and the 1-3 percent forecast for this year was under review.

The MAS said it also was closely watching risks related to Britain’s vote to leave the European Union, the U.S. economic recovery and the slowdown in China.

“The current stance of monetary policy remains appropriate for overall economic conditions,” Ravi Menon said in the central bank’s annual report.

“Unless there is a marked deterioration in the global economy or significant shift to the inflation outlook, there is no need to change the monetary policy stance.”

The MAS manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate (NEER).

In April, the central bank unexpectedly eased policy by setting the rate of appreciation of the Singapore dollar’s policy band at zero percent.

Data on Monday showed Singapore’s headline inflation rate fell by a lower than expected 0.7 percent on the year in June after falling 1.6 percent in May.

BREXIT RISK

Britain’s June 23 vote to leave the EU has sparked fears of another blow to the already sluggish global economy, with the International Monetary Fund last week cutting its global growth forecasts for the next two years.

“The Singapore economy is expected to continue on a modest and uneven growth path, with further uncertainty arising from recent developments in the UK and the Eurozone,” the MAS said in its report.

Such Brexit-related uncertainty could lead to “further financial market volatility, with possible knock-on effects on financial intermediation and capital flows globally, and economic growth more generally.”

The nominal effective exchange rate of the Singapore dollar remains within the policy band, notwithstanding the recent volatility in exchange rates, Menon said, adding MAS stood ready to curb excessive moves in the trade-weighted dollar.

Menon also said Singapore’s banking system was solid, though non-performing loans at 1.7 percent in the first quarter were up from 1.3 percent a year ago. Banks have set aside provisions of more than 100 percent of the loans.

The financial sector grew 5.3 percent last year, compared with 2.0 percent growth in gross domestic product, but this year “financial services and overall economic growth will be closer”, Menon said.

Assets under management in Singapore grew 9 percent last year to S$2.6 trillion ($1.9 trillion).

MAS recorded a profit of S$0.2 billion in the 2015/16 financial year, down from S$0.3 billion the year before.

Turning to the property market, the MAS said there has been a “measured decline” in property prices after the central bank introduced a series of property-cooling measures since 2009, but added that it wasn’t letting its guard down.

After reaching a peak in the third quarter of 2013, private residential property prices have declined by an average 0.9 percent each quarter over 10 consecutive quarters, the MAS said.

“It is not time yet to ease the property cooling measures,” Menon said.

(Additional reporting by Saeed Azhar and Aradhana Aravindan; Editing by Sam Holmes and Kim Coghill)