Singapore keeps monetary policy unchanged despite Q3 GDP contraction

SINGAPORE: Singapore's central bank held policy steady on Friday despite a surprisingly sharp economic contraction in the third quarter, saying the current exchange-rate based policy band was able to accommodate near-term weakness in inflation and growth.

Still, some analysts said an easing in coming months cannot be ruled out after the trade-reliant economy unexpectedly contracted by 4.1 percent in the third quarter on a seasonally adjusted annualised basis, from the previous three months. Forecasts had centered on 0.3 percent growth.

The central bank kept the width of the policy band and the level at which it is centred unchanged, maintaining the rate of appreciation of the Singapore dollar policy band at zero percent.

"The bigger story is not that MAS kept policy on hold. The bigger story is that GDP was very, very weak and if you look at the sectors - the services side is essentially in recession," said Michael Wan, economist at Credit Suisse in Singapore.

"I think they should ease - inflation is low, growth is slow and slowing and it looks like it's not going to improve anytime soon," Wan said.

The MAS manages monetary policy by changes to the exchange rate, rather than interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners because trade flows dwarf the city state's economy.

"MAS assesses that a neutral policy stance will be needed for an extended period to ensure medium-term price stability," the Monetary Authority of Singapore (MAS) said in its semiannual monetary policy statement.

"The current policy band provides some flexibility for the S$NEER to accommodate the near-term weakness in inflation and growth."

The MAS said over the medium-term core inflation is still expected to trend towards but average slightly below 2 percent. All items inflation has troughed and is expected to come in at 0.5-1.5 percent in 2017, the central bank said.

Sixteen of 18 analysts in a Reuters survey had predicted that the MAS would keep monetary policy unchanged this month.

In April the central bank unexpectedly eased policy to support a stuttering economy.

Economic growth in the affluent city state has remained anaemic in the past two years, hobbled by slack global demand and a slowdown in China - Singapore's biggest trading partner. Adding to the strain, lower global oil prices have also hurt earnings of oil rig builders.

The Singapore dollar rose slightly after the MAS decision and the GDP release. It last stood at S$1.3851 to the U.S. dollar, up 0.3 percent on the day. - Reuters