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Singapore eases monetary policy as economy dodges technical recession

The Monetary Authority of Singapore eased its policy for the first time in three years as the economy avoided a technical recession in the third quarter amid subdued inflation and persisting global trade concerns.

The central bank decided to "reduce slightly the rate of appreciation" of the Singapore dollar nominal effective exchange rate, or S$NEER, policy band, without specifying by how much the slope was eased. It maintained the width and center of the policy band.

"MAS will continue to closely monitor economic developments and is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly," it said.

Unlike other central banks that target interest rates, Singapore implements its monetary policy through foreign exchange operations, allowing the Singapore dollar to advance or decline against a trade-weighted basket of currencies.

The Oct. 14 decision marks the first time that the central bank loosened its monetary policy since April 2016. The Singapore dollar was trading 0.25% higher versus the U.S. currency as of 2:12 p.m. local time.

Based on estimates released the same day by the Ministry of Trade and Industry, the Singapore economy grew 0.1% year over year in the third quarter, matching the rate of growth in the prior three-month period. Seasonally adjusted quarterly growth came in at 0.6%, compared with a 2.7% contraction in the second quarter of 2019, meaning the city-state narrowly avoided a technical recession.

Meanwhile, core inflation dropped to an average of 0.8% year over year in July-August from 1.4% in the first half of the year. The MAS expects core inflation to reach the lower end of the 1%-2% range in 2019 and average 0.5%-1.5% in 2020.

The central bank said GDP growth will likely come in at around the midpoint of the zero percent to 1% forecast range this year, before "modestly" improving in 2020.

Given this economic backdrop, the central bank is likely to loosen its monetary policy further, according to Mitul Kotecha, senior emerging markets strategist at TD Securities.

The bank is likely to ease to a zero slope at its April 2020 meeting unless economic conditions significantly improve or inflation strengthens, added Kotecha, who estimated that the slope of the S$NEER policy band was reduced by 0.5% at the Oct. 14 meeting.