Monetary Authority of Singapore Endorses Faster Singapore Dollar Rise

October 14, 2010

The semi-annual S$ review gave a thumbs-up to the policy of gradual trade-weighted currency appreciation and in fact steepened the potential pace of that advance.  GDP had contracted in Singapore during the third quarter but will record faster growth in 2010 than even China achieves.  The Review published today finds the slower pace of growth (10.3% on year in 3Q after 18.8% in 2Q) acceptable and even preferable because it is more likely to be sustainable.  Officials note that resource usage especially of labor is already high and that consumer price inflation is edging upward.  Their hope is “to cap CPI inflation at 2-3% in 2011 from 2.5-3.0% in 2010.”  Core inflation “is expected to average around 2% in 2010 and 2-3% next year,” and GDP growth is projected at 13-15% this year but at a lower pace in 2011 consistent with the trend of potential GDP.

MAS does not explicitly set an interest rate target, although domestic interbank 3-month rates have been hovering around 0.5%.  Monetary policy is instead conducted via a controlled steering of the Singapore dollar, which has been trading in the upper half of its prescribed trade-weighted band.  Against its U.S. counterpart, the S$ has advanced more than 8.0% so far in 2010.  Prior to this past April, the bias of the currency trading band had been neutral.  Today’s decision does not change the band’s center-point but both widens the range and steepens the slope for potential appreciation.

The policy decision keeps the containment of inflation paramount even as currency fears intensify in Asia.  Some investors have surmised that Singapore authorities would not have endorsed faster future appreciation of their currency without strong confidence that China is poised to allow faster appreciation of the yuan.  In that sense, Singapore’s action helped fan a rumor that the Fed will do less quantitative easing than some U.S. policymakers will like in exchange for Beijing officials letting their yuan climb at a quicker speed.  I doubt any formal deal between the government of China and the Federal Reserve is in fact being planned.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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