Monetary authority acts to curb inflation
The Singapore dollar climbed to a record high yesterday after a surprise tightening in monetary policy aimed at combating inflation.
The currency jumped 1.7 per cent in Asian trade to touch a high of $1.3567 in afternoon trade - its largest single-day gain since October 1998.
While a rising Singapore dollar can provide consumers some respite from spiralling global commodity prices, it also means exporters have to bear the brunt of an eroding competitiveness with their products. Citigroup economist Kit Wei Zheng called the move “drastic”.
Mr Joseph Tan, a strategist at Fortis Bank, told Bloomberg: “The way they opted to tighten was aggressive as they typically don’t muck around with the centre of the band unless there is a crisis. It tells me we are behind the curve on inflation, and we are playing catch up.”
In its semi-annual policy review, the Monetary Authority of Singapore (MAS) said: “Even as the downside risks to economic growth have increased, global inflationary pressures remain high.”
“Against the backdrop of continuing external and domestic cost pressures, an upward shift of the policy band at this point will help to moderate inflation going forward, while providing support for sustainable growth in the economy,” its statement said.
As is its practice, the MAS did not specify what the Singapore dollar’s new permissible band would be, leaving traders to test the waters themselves. There were rumours the MAS did intervene yesterday to prevent the currency rising too much.
Mr Nizam Idris, the director of fixed income, rates and currencies at UBS, said: “If there’s a need for intervention, it’s probably to slow down the knee-jerk reaction. We don’t like volatility and I don’t think the MAS likes volatility.”
The MAS manages the currency against an unspecified basket of currencies, comprising Singapore’s largest trading partners.
It has twice revised its 2008 inflation forecast upwards, most recently to 4.5-5.5 per cent. Inflation hit a 26-year high of 6.6 per cent in January and remains worrying.
The policy surprise move left research houses scrambling to raise their Singapore dollar forecasts. UBS now has a one-month forecast of $1.35 for the Singapore dollar.
Standard Chartered Bank economist Alvin Liew said exporters of mass market electronics will be especially hit as margins get squeezed. “Rental rebates would be one way to help these manufacturers,” he said. “Although, in terms of the products themselves, I don’t think there’s much the Government can do.”
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