The Monetary Authority of Singapore surprised the market on Thursday by unexpectedly easing its monetary stance to neutral with the adoption of a zero-percent appreciation policy for its currency due to a stagnation in economy growth.
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The slide against the USA dollar on Thursday marked a reversal from an 8-month high, and against the euro, the Singapore unit’s move was off a 1-month high. Barring a recovery before the close, the Singapore dollar was set its largest daily depreciation since August 11, according to Thomson Reuters data.
The Monetary Authority of Singapore surprised markets on Thursday by shifting its exchange rate policy, leading to weakness in currencies across the Asia Pacific region.
The Korean won KRW=KFTC eased 0.3 percent after South Korea’s ruling conservative party suffered an upset defeat in a parliamentary election in a stinging blow to President Park Geun-hye.
An unexpected fall in US retail sales in March supported Yellen’s cautious approach.
Elsewhere, the Singapore dollar SGD=D3 weakened 0.6 percent after the city state’s central bank eased its policy, saying it will guide the Singapore dollar essentially flat and issued a downbeat assessment of its economy.
A softer Singapore dollar can put upward pressure on local interest rates as investors seek higher yields as compensation for holding the weakening currency.
Policymakers at the MAS warned that the “Singapore economy is projected to expand at a more modest pace in 2016 than envisaged in the October policy review”. “MAS Core Inflation should also pick up more gradually over the course of 2016 than previously anticipated, and is now likely to fall below 2 per cent on average over the medium term”.
The step comes amid a background of other Asian central banks easing policy. The last time the MAS implemented a zero-percent appreciation policy was in October 2008 in the aftermath of the collapse of Lehman Brothers that precipitated the global financial crisis. The IMF raised its forecast for emerging and developing Asia to 6.4% by 0.1 percentage point, lifted by an improved forecast for Chinese growth, upgraded by 0.2 percentage point to 6.5%. Callow suggests the MAS “is delivering a strong message by returning policy to post-GFC settings”.
“The big picture is that we expect Singapore’s economy to grow at a fairly sluggish rate of just 2 percent this year and next”, said Daniel Martin, senior economist at Capital Economics. The estimate beat expectations of a 1.7% increase by economists polled by The Wall Street Journal.
The Monetary Authority of Singapore is to host a week-long “Fintech Festival” to promote the island economy as a global hub for innovative financial services.
The Indonesian rupiah, Malaysian ringgit, Philippine peso, and Thai baht all fell against the dollar on Thursday as well.
The local currency dropped for a second day after the NEER announcement.
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“Singapore is leveraging on the twin policy levers-fiscal and exchange rate-to address the potential downside risks to growth and inflation as well as a deteriorating labour market”, said Weiwen Ng, ASEAN economist at ANZ Research. The manufacturing sector contracted 2% from a year ago, dragging down the economy as demand from China shrank.
