In brief

  • The Monetary Authority of Singapore (MAS) adopted a more dovish stance by slightly reducing the slope of the SG$ NEER policy band, while keeping the width and centre-point unchanged.
  • The MAS expects economic growth to slow in 2025 as trade tensions weight on manufacturing; while inflation will remain low and stable amid moderating import prices and labor costs. 
  • Short tenor interest rates have declined but remain attractive.  SG$ cash investors may consider exercising caution and diversifying across maturities and instruments due to ongoing market volatility and global uncertainties.

Introduction

At its first monetary policy meeting of 2025, the Monetary Authority of Singapore (MAS) adopted a more dovish policy stance by slightly reducing the slope of the Singapore Dollar Nominal Effective Exchange Rate (SG$ NEER) policy band, while keeping the width and centre-point of the band unchanged.  Given the MAS’s traditionally hawkish stance, the market had only partially anticipated this policy shift.  The central bank justified its decision by noting that “growth momentum is expected to slow” and “core inflation has moderated more quickly than expected”.

Fig 1: The SG$NEER has been upward sloping since October 2021; Singapore short yields have declined in line with US yields. 

Source: Goldman Sachs, Bloomberg and J.P. Morgan Asset Management; data as at 24 January 2025.

 

Goldilocks economics

While noting that 2024 economic growth was “stronger than expected”, helped by robust trade and financial services, the MAS forecasts a slowdown in Singapore's economic growth in 2025.  GDP is projected to moderate to 1.0–3.0%, down from 4.0% in 2024. This level more closely aligns with the economy’s long-term potential and is primarily due to the potential impacts from global trade policy tensions affecting the manufacturing and trade-related services sectors, which are expected to offset resilient consumer spending and domestic demand.

Fig 2: Headline and core inflation have fallen from 2021 peaks, while economic growth hit a 3-year high of 4% in 2024. 

Source: Goldman Sachs, Bloomberg and J.P. Morgan Asset Management; data as at 24 January 2025. SAAR = seasonally adjusted annual rate

Concurrently, the MAS was pleased to observe that inflation “stepped down by more than expected” in the fourth quarter as the pace of price increases “moderated across a broad range of goods and services”.  The central bank’s preferred core inflation measure has fallen to 1.9%y/y and it is forecasted to average 1.0–2.0%y/y in 2025, lower than previous projections.  Inflationary pressures are expected to remain contained as import prices moderate, labour costs slow and inflation for essential services are offset by government subsidies.

 

Market Reaction and strategy positioning

Markets had not fully priced in the MAS policy adjustment, with some economists expecting the central bank to wait for further confirmation that inflation was on a sustainably lower path.  Nevertheless, anticipating a more dovish stance this year, the SG$ NEER had already declined from the top to the middle of its trading range; while short term interest rates have fallen and the curve flattened.  

We anticipate the SG$ will stay near the midpoint of its trading range, and interest rates will hover around current levels. However, there are significant upside and downside risks, particularly due to rising trade tensions and as robust U.S. economic data suggests that the Federal Reserve is unlikely to implement aggressive rate cuts in 2025.

 

Outlook

The MAS's unexpectedly swift dovish pivot, despite its historically hawkish stance, sends a positive signal, indicating confidence that inflation risks are contained and prices will remain "low and stable." However, monetary policy remains restrictive, with the SG$ NEER still on a "modest and gradual appreciation path" that the MAS believes will ensure medium-term price stability. While we believe the likelihood of future monetary policy easing has increased, the absence of forward guidance from the MAS and its cautious approach due to global economic uncertainties means the timing of any future policy adjustment remains uncertain and data dependent.

For SGD cash investors, domestic interest rates have declined but remain attractive by historical standards, offering appealing current yields. The flattening yield curves pose challenges for adding longer maturity securities without sacrificing yield, though recent re-steepening provides opportunities to extend duration. Given elevated market volatility from geopolitical concerns and central banks' focus on data dependency, we recommend caution and diversification across different maturities and instruments to achieve optimal risk-adjusted returns.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.
This information is generic in nature provided to illustrate macro trends based on current market conditions that are subject to change from time to time. This generic information does not take into account any investor’s specific circumstances or objectives and should not be construed as offer, research or investment advice.