Singapore is expected to ease monetary policy on Friday, hoping to slow any further appreciation of the Singapore dollar’s recent foreign exchange rate strength to help the flagging economy, while keeping a lid on inflation.
Singapore manages monetary policy by letting the local dollar rise against the currencies of its main trading partners to control imported inflation, and is often a policy trend-setter or sorts in the region.
MAS tends to react faster to changes in the external environment than its much-larger Asian neighbours as its half-yearly policy reviews force it to look further ahead. Singapore, whose trade is three times gross domestic product (GDP), is also far more affected by changes in the global economy.
Twelve out of 13 forecasters polled by Reuters expect the Monetary Authority of Singapore (MAS) to say in its policy statement that it will continue to let the local dollar appreciate, but at a slower pace than it did earlier in the year.
Four of the 12 also predicted MAS will also take the additional step of re-centering downwards the policy band in which the Singapore dollar trades, which effectively translates into a one-time devaluation of the local currency.
“Elevated headline inflation will likely prevent a shift to a neutral or zero bias,” said Bank of America Merrill Lynch economist Chua Hak Bin.
Merrill expects MAS will reduce its appreciation bias for the Singapore dollar nominal effective exchange rate (NEER) to an annualised 1-2 percent from the current 3 percent, with no change to the midpoint of the trading band.
The 13th forecaster, Standard Chartered, is betting MAS will shift its policy stance completely and call for a zero appreciation of the Singapore dollar against the currencies of its main trading partners.
Singapore slightly tightened policy in April by sanctioning an immediate rise in the value of its dollar, the world’s 12th most actively traded currency, saying headline inflation will likely stay elevated.
Buoyed by a wave of inflows into fast growing emerging Asian markets, the Singapore dollar had been one of the strongest performing Asian currencies this year, surging nearly 7 percent against the US dollar from January to end July and hitting a record high of 1.1993.
It and its Asian peers have been in retreat in the last two months as global market turmoil prompts investors to dump riskier assets for the safety of the US dollar, though regional currencies have shown some signs of stabilising in the past week on hopes that Europe will resolve its sovereign debt crisis.
The Singapore dollar slid to nearly 1.32 early last week, but is currently trading around 1.285, about 0.7 percent lower than the start of the year.