Singapore eases monetary policy in surprise move
SINGAPORE on Wednesday became the latest country to ease monetary policy in a surprise move as plunging oil prices hit inflation and the central bank looks to boost the tepid economy.
The Monetary Authority of Singapore (MAS), the city-state’s central bank, said it would slow the appreciation of the local dollar against a basket of other currencies by reducing the slope of its policy band. The MAS also lowered its inflation outlook “largely due to the decline in global oil prices”.
The news sent the local dollar plunging. The greenback bought Sg$1.3569 at one stage, its highest since August 2010 and well up from Sg$1.3441 on Tuesday.
Singapore uses the exchange rate as a key monetary policy tool, guiding the local dollar against a basket of currencies of its main trading partners within an undisclosed band.
“This measured adjustment to the policy stance is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy,” the MAS said in an unscheduled policy statement.
It normally issues policy statements twice a year in April and October.
“The reason the MAS decided to reduce the slope of the band is the sharp recent drop in inflation,” research house Capital Economics said in a commentary.
Consumer prices shrank 0.2 percent year on year in December and 0.3 percent in November, while official figures showed the economy expanded at a slower-than-expected 2.8 percent last year.
The MAS predicted prices could fall as much as 0.5 percent this year or grow 0.5 percent, compared with previous an October forecast of 0.5-1.5 percent growth.
Inflation rates around the world have been falling as the price of oil has sunk more than 50 percent since June to sit at almost six-year lows.
Wednesday’s decision by the central bank follows similar moves in South Korea, China and India where governments are fighting to ward of deflation and kickstart their economies. Canada, Turkey and Denmark have also lowered their rates recently.
And last week the European Central Bank, which already has rates at record lows, unveiled an unprecedented bond-buying scheme in response to data showing prices fell in December for the first time in five years.
Howie Lee, an investment analyst with Phillip Futures in Singapore, said a weaker local dollar will be good for the trade-reliant island’s exports, making them more competitive in the international market.
“Singapore’s exports have been carrying the weight of a strong Singapore dollar and high pass-through labour costs,” he said in a market commentary.
“With the reduction in band slope, one load is at least taken off Singapore’s shoulder. Singapore stocks could be boosted as goods and services become more competitive regionally.”