Singapore has joined a growing number of countries in using monetary policy to try to ward off an economic slowdown.
The Monetary Authority of Singapore said that it would seek a slower pace of appreciation for the Singapore dollar against a basket of currencies.
The central bank guides the local dollar against the basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and centre of the band.
For many, Singapore’s move – which had the effect of weakening its currency yesterday – adds weight to speculation that the US Federal Reserve might refrain from raising interest rates this year to counter the deflationary effect of falling oil prices.
After the Singapore authority announced its plan, the island’s dollar dropped yesterday by 1 per cent to S$1.3524 per US dollar as of 1.06pm local time, the weakest since September 2010.
The currency has fallen almost 6 per cent against the US dollar in the past three months, the third-biggest loser among 11 most-traded Asian currencies tracked by Bloomberg.
The US Federal Reserve was to wrap up a two-day meeting yesterday and there is growing doubt that the chairwoman Janet Yellen will signal a rise in interest rates.
“There is speculation that the Federal Reserve will raise rates but we don’t think it’s going to happen as everybody will continue to try and protect their currency because they need to weaken it as much as possible to support growth and inflation,” said Nour Eldeen Al Hammoury, the chief market strategist at Abu Dhabi-based ADS Securities.
“That’s why the authorities in Singapore maybe took the decision before the Federal Reserve [meeting]. ”
The Singapore authority, which uses its currency rather than interest rates as a monetary tool, follows the European Central Bank and other lenders of last resort in countries including Canada, Turkey, India and Egypt which are taking action against the threat of deflation and sluggish growth prospects.
The falling price of oil which was initially thought to be positive for global growth is now increasingly being regarded as negative as it will not allow central banks to meet their inflation targets, analysts say.
Yesterday, Singapore cut its inflation forecast for 2015.
The World Bank this month said the global economy resembles a train being pulled by a single engine, the US.
The Washington-based lender cut its 2015 global growth forecast to 3 per cent from 3.4 per cent.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, gained 11 per cent last year, the biggest annual gain since 2004 as the US economy outperformed its peers. “I think the Fed will continue to hold rates where they are,” said Srishailan GS, vice president for treasury and capital markets at Invest AD. “If the dollar gets too strong they will probably not be able to raise rates also because for your domestic economy it will be a double jeopardy. If your currency is very strong your exports are going to get hit and the same time you try and increase interest rates, the cost of production is also going to go up.”
mkassem@thenational.ae
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