Singapore changes monetary policy, dollar falls to new low
Singapore changes monetary policy, dollar falls to new low
SINGAPORE (AP): In a surprise move designed to combat a sharp recession, Singapore's central bank said Thursday it has abandoned its policy of promoting slow appreciation of the island-state's currency.
A day after the government said it would announce a package of measures within weeks to bolster the economy, the Monetary Authority of Singapore - the nation's de facto central bank - surprised the currency market by shifting to a neutral exchange rate policy from a previous tightening stance.
"This caught a lot of us by surprise, but they (MAS) had no choice," said Jimmy Koh, head of treasury research at United Overseas Bank Ltd. "The economy was falling off the cliff."
Julian Jessop, an economist with Standard Chartered Bank, said a weaker Singapore dollar could affect foreign exchange markets throughout the region. However, the move wasn't "shocking" given the bleak economic data issued this week, he said.
The Singapore government released figures Tuesday that showed the country had fallen into a recession after two back-to-back quarters of gross domestic product contraction. It also slashed its 2001 economic growth forecast to 0.5 percent to 1.5 percent from an earlier forecast of 3.5 percent to 5.5 percent.
The new exchange rate policy could be a double edged sword for Singapore, promoting its exports by making its products cheaper but at the same time raising the costs of many imports.
On Wednesday, the government said that it would announce package of measures in Parliament - which is due to reconvene on July 25 - aimed at cutting business costs and curbing rising unemployment.
Singapore is a wealthy Southeast Asian nation with no natural resources. It depends on imports for food and most goods, and its economy relies heavily on the export of electronics.
The new MAS policy will allow the Singapore dollar to fluctuate within set boundaries, but the bank will "intervene to curtail excessive volatility" and to "prevent the currency from breaching the upper or lower bounds when necessary," said Tharman Shanmugaratnam, MAS managing director.
"Against the backdrop of a weaker external economic environment and a more protracted global electronics downturn, near-term growth prospects for the Singapore economy have turned significantly weaker while inflationary pressures are subsiding," said Shanmugaratnam.
Shanmugaratnam said the fluctuations in the exchange rate will mean that some goods will be more expensive.
Since January, the central bank had promoted a gradual, modest appreciation of the Singapore dollar on a trade weighted basis. The policy was aimed at capping medium-term inflationary pressures while supporting economic activity as growth began to moderate.
Shanmugaratnam said he did not believe the central bank would have to modify its new policy before the end of the year.
"The slowdown reflects a decline in demand, not an erosion of competitiveness. There is no reason for any persistent weakening of the Singapore dollar," said Shanmugaratnam.