MAS tightens Singdollar policy for first time in 6 years

The Monetary Authority of Singapore (MAS) said on Friday that it is slightly increasing the slope of the Singdollar nominal effective exchange rate (S$NEER) policy band to allow for "modest and gradual" appreciation, moving away from the neutral stance it has held since April 2016.

The width of the policy band and the level at which it is centred will be unchanged.

Following the announcement, the Singdollar depreciated against the greenback, trading at S$1.3129 per US dollar at 10am, from its close of S$1.3126 on Thursda, before stabilising. At 11.20am, the Singdollar strengthened slightly to S$1.3119.

In the equity markets, the Straits Times Index was up 0.68 per cent, or 23.69 points, at 3,492.30.

The move to normalise the exchange rate policy was not a surprise to economists, coming on the back of a strengthening economy, improved labour statistics, and rising inflation.

The MAS manages the exchange rate against a trade-weighted basket of currencies of major trade partners. The Singdollar is allowed to float within an undisclosed S$NEER band that can be adjusted when monetary policy is reviewed at biannual meetings in April and October.

In its April bi-annual monetary policy statement (MPS), the MAS said: "The Singapore economy has evolved as envisaged since the October 2017 policy review, and should continue on a steady expansion path in 2018. However, an escalation of the US-China trade dispute remains possible, and if it occurs, will have significant consequences for global trade."

Upward pressures on core inflation are expected to persist over the course of this year and beyond, underpinned by an improving labour market. For 2018, core inflation is projected to come in within the upper half of the 1-2 per cent forecast range.

As such, the decision to slightly increase the slope of the S$NEER from zero per cent previously, is "consistent with a modest and gradual appreciation path of the S$NEER policy band that will ensure medium-term price stability", said the MAS.

"The measured adjustment to the policy stance takes into account the uncertainty in macroeconomic outcomes presented by ongoing trade tensions," said the MAS.

Since October 2017, the S$NEER has appreciated in the upper half of the policy band, apart from a brief period of decline in early 2018. This development reflected, in part, broad-based US dollar weakness and depreciation in a number of regional currencies against the SGD.

On Friday, Singapore's Ministry of Trade and Industry released advanced estimates indicating that the economy expanded 4.3 per cent in the first three months of 2018 on the back of strong manufacturing growth.

The year-on-year rise was in line with economist expectations of 4.3 per cent growth, and beat the 3.6 per cent expansion in the final quarter of 2017.