MAS signals it will allow stronger Sing dollar to fight inflation
April 11, 2008
Strong Q1 GDP numbers seen giving MAS more room to tackle price rises
The
Monetary Authority of Singapore (MAS) yesterday effectively gave a one-time
boost to the Singapore dollar to fight inflation, surprising analysts
who had expected the central bank to leave its stance on the currency
unchanged.
The
MAS said that it would re-centre its undisclosed policy band for the
trade-weighted Sing dollar, or S$NEER, at the prevailing level of the
S$NEER - widely believed to be near the top of the previous tolerated
range - while leaving the slope and width of the band unchanged.
The
shift would help to moderate inflation ‘while providing support for
sustainable growth in the economy’, the MAS said in its closely watched
twice-yearly monetary policy statement.
Currency
strategists suggested that the government’s better-than-expected advance
estimate of 7.2 per cent gross domestic product growth in the first
quarter - also released yesterday - had temporarily relieved fears that
a stronger currency would stifle economic growth and gave the MAS room
to tackle rising inflation by nudging the Sing dollar higher.
Unlike
the US Federal Reserve, which sets interest rate targets, the MAS implements
its monetary policy by steering the exchange rate of the Sing dollar
against the currencies of Singapore’s major trading partners.
Raising
the policy band by setting its new mid-point at the prevailing level
of the S$NEER is more abrupt than making the slope of the band steeper
- as the MAS did last October - which would encourage a faster but gradual
pace of currency appreciation.
The
last time the central bank re-centred the policy band without changing
its slope was in July 2003. In April 2004, it shifted from a neutral
policy stance to the ‘gradual and modest’ appreciation stance that it
has used since.
Analysts
suggested that the MAS’s latest move - besides mitigating current inflation
by lowering the price of imports - is also intended to arrest expectations
of future inflation. If such expectations become entrenched, they could
fuel a vicious cycle of wage and price increases that could spin out
of control.
‘Immediate
Sing dollar strengthening is the only possible intention,’ said HSBC
economist Robert Prior-Wandesforde. The move ‘will serve to reinforce
the bank’s anti-inflationary credibility’, he added.
Analysts
at Goldman Sachs, HSBC and Standard Chartered Bank estimate that the
move has lifted the policy band for the S$NEER by 1.5 per cent, consistent
with an exchange rate of about S$1.35 to the US dollar.
But
rising prices will remain a worry despite a stronger Sing dollar, which
will not ease inflation pressure from domestic sources such as higher
housing costs, analysts said. Most expect the S$NEER to trade near the
top of the new policy band until the MAS issues its next monetary policy
statement in October.
The
MAS expects inflation this year - as measured by the consumer price
index - to be in the upper half of its 4.5-5.5 per cent forecast range.
But OCBC Bank analysts expect inflation to reach 6 per cent.
‘Given
fresh record highs in many commodity prices, especially with food inflation
which will hit developing countries more than the developed countries,
we see little near-term relief on inflation,’ said OCBC analysts Selena
Ling and Emmanuel Ng in a report.
Yesterday,
the Sing dollar strengthened 1.8 per cent to a high of S$1.3567 in afternoon
trading, before easing slightly to S$1.3572 at 7pm, according to Bloomberg
data. Since the MAS’s statement on Oct 10, the Sing dollar has gained
7.4 per cent.
Goldman’s
revised one-year forecast for the Sing dollar/US dollar exchange rate
is S$1.32, while OCBC and Stanchart are forecasting an exchange rate
of S$1.325 and S$1.35 at this year-end.
Source
: Business Times - 11 Apr 2008
