The Monetary Authority of Singapore (MAS) is taking a tighter monetary stance. In its half-yearly review on Wednesday, the central bank says it will allow the Singapore dollar to appreciate faster against its basket of currencies.
Overall though, it is keeping to its policy of a modest and gradual appreciation of the local currency.
It cited inflation as a key reason for the tightening move which caught the markets by surprise.
But according to the MAS, strong economic growth has brought along with it increasing inflationary pressures.
It is now expecting the consumer price index inflation for 2007 to come in at 1.5 to 2 per cent.
This is up from the previous estimate of 0.5 to 1.5 per cent.
Song Seng Wun, Regional Economist, CIMB-GK Research, says: "Probably because they didn't take into account the higher food inflation that we're currently experiencing in Singapore. Actually it's not just in Singapore but around the region as well. But because a chunk of consumer price basket is imported food - things like Australian pork - and the Australian dollar has been doing quite well of late."
The slight tightening bias is aimed at keeping prices stable.
Analysts say the move suggests that the MAS is serious about keeping inflation under control.
They are expecting the Singapore dollar to see more upside, rising to as high as S$1.43 against the greenback by end of next year.
Jimmy Koh, Vice-President - Global Markets and Investment Management, UOB Group, says: "Will that cream off Singapore's export competitiveness, I don't think so. The currency appreciation is an affirmation of the health of the Singapore economy which is looking positive. Studies show that your global demand is three times more important than currency adjustment. So as long as global environment remains favourable, the currency appreciation is not going to cream off Singapore's competitiveness much."
UOB says a stronger currency may lead to even more capital inflows as investors will enjoy not only rising asset prices, but a stronger currency.
Mr Koh says: "Now what you have is another leg to compensate or reward investors which is currency rate. So if you have asset prices rising and yet currency appreciating, I think you're gonna see more money coming into Singapore."
The MAS manages monetary policy through a band, against a trade-weighted basket of currencies.
The last time it made changes to its monetary policy was in 2004. - CNA/ch
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