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MAS: Disinflationary pressures mount as fiscal policy remain the vanguard against COVID-19 crisis

by Has
28/04/2020
in Current Affairs, Economics
Reading Time: 3 mins read
0

Photo: news.bitcoin.com

According to the half-yearly Macroeconomic Review released by the Monetary Authority of Singapore on Tuesday (28 April), disinflationary pressures will increase in the economy with the demand shock from COVID-19 even as fiscal policy is the main tool to mitigate the crisis.
For the first time since 2002, both core and headline inflation rates are expected to become negative this year. Based on the official forecast, core and headline inflation rates are between -1 per cent and 0 per cent in 2020.
This year, all other major components of the MAS core inflation measure, aside from food prices, are expected to fall. Private road transport and accommodation are excluded in the MAS core inflation measure.
Due to the crash in travel demand, prices are also expected to decline for holiday expenses and airfares in the coming months. A weakened labour market and the social-distancing measures will also lower prices for discretionary services such as recreation and dining.
Government support will mean lower healthcare and education fees whereas the global oil price crash has made electricity and gas prices cheaper. Furthermore, inflation in the near term will be lower due to the higher domestic and international spare capacity.
MAS stated that the gross domestic growth forecast could be below the range of -4 and -1 per cent if downside risks manifest themselves. Thus, the global development of the pandemic will determine the Singapore’s economic outlook.
The risks include the prolonging of the pandemic, the persistent uncertainty caused by the difficulty to entirely contain the virus as well as the more strict COVID-19 containment measures in the country.
In an interview with Bloomberg last week, Minister for Trade and Industry Chan Chun Sing remarked that it was “very likely” that growth would reach below the forecast range.
There will be higher resident unemployment and retrenchments even though wages, rather than employment, will suffer more during the crisis in the short term.
MAS also noted that fiscal policy is seen as the main policy tool to address the crisis as opposed to monetary policy.
On 30 March, MAS released its latest monetary policy statement detailing its monetary policy stance as the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band was flattened and lowered. The new rate of appreciation is now zero per cent per annum rate of appreciation beginning at the prevailing level of the previous S$NEER.
MAS stated that it was “an appropriate level to prevent a broadening of disinflationary pressures” which is also supported by steps to relax regulatory requirements for banks, work with the financial sector to smooth credit conditions for businesses and households, as well as boost liquidity in the financial system.
“The zero per cent appreciation of the band going forward would also impart a degree of stability to the trade-weighted exchange rate,” MAS added.
Therefore, Government policies are being complemented by monetary policy, with MAS asserting that “fiscal policy will provide the main contribution to the expansionary macro-policy stance this year while delivering significant short-term relief to households and firms”.
Economic damages from the pandemic can be eased with the cooperation of monetary, financial fiscal, and regulatory policies. This will “help prevent a severe, temporary shock from imparting a deeper and longer-lasting imprint on the economy,” MAS concluded.

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Tags: COVID-19

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