Unprecedented Major Action
The Monetary Authority announced in its biannual monetary policy statement that, in addition to adjusting the central point of the nominal effective exchange rate (S$NEER) upward, which resulted in an immediate appreciation of the Singapore Dollar, it also changed its previously adopted neutral stance, allowing the Singapore Dollar exchange rate to gradually rise steadily and altering the slope of the fluctuation range.
This unprecedented major action not only surprised analysts but also affected the short-term swap rates, which fell by 6 to 7 basis points.
Furthermore, due to the high weight of the US dollar in the local basket of currencies, after the Monetary Authority issued its policy statement yesterday, the US dollar quickly dropped from 1.3920 to around 1.3800 against the Singapore Dollar. The Singapore Dollar later surged 1% against the US dollar, marking the largest appreciation in 10 months. The market also estimates that other regional currencies will follow suit in appreciating.
The Monetary Authority also raised its forecast for annual inflation from the original 2% to 3% to 2.5% to 3.5%, citing that global commodity prices and private car prices are expected to continue rising, and some domestic inflation factors may emerge in the coming quarters.
The Monetary Authority stated: “Our economy is rebounding from recovery, and with a more optimistic international economic outlook, it is estimated that our economy will continue on the path of steady recovery. Meanwhile, with rising global commodity prices and some domestic costs (salaries and commercial rents), inflationary pressures are also expected to increase.”
Some analysts believe that the major action taken by the Monetary Authority yesterday is a precautionary measure to prevent future issues.
A report from Barclays Capital noted: “The tightening of monetary policy shows the (Monetary Authority's) greater determination to decisively prevent inflation issues, possibly paving the way for this year's elections.”
