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    Jan 29, 2015

    MAS taps the brake on Singdollar's rise

    IN A surprise move, the central bank here has acted months ahead of its next scheduled meeting to tweak its exchange-rate policy to slow the Singapore dollar's rise.

    The almost unprecedented step was prompted by plunging oil prices, which have quelled inflation and eased the need for a strong Singdollar to combat rising prices.

    After the 8am announcement by the Monetary Authority of Singapore (MAS), the Singdollar slid by as much as 1.1 per cent against the greenback yesterday.

    This was the first time since the bust in 2001 that the MAS adjusted monetary policy outside of its regular meetings in April and October each year.

    Economists said that it was the first unscheduled move in recent memory outside of a crisis.

    MAS said yesterday that it will maintain the modest and gradual pace at which the Singdollar appreciates against a basket of other currencies, but reduce the slope of the band within which the exchange rate fluctuates.

    MAS uses the exchange rate as its main tool to strike a balance between controlling inflation from overseas and acting to spur economic growth here.

    A stronger currency helps counter inflation, as imports are cheaper in Singdollar terms, but exports become more expensive in foreign markets, so this can hurt trade competitiveness.

    A weaker Singdollar may benefit exporters, but penalises consumers with steeper inflation.

    MAS has also dramatically cut its inflation forecasts for this year, on the back of plunging oil prices.

    It now expects inflation to come in between -0.5 per cent and 0.5 per cent this year.

    This is down from earlier estimates of 0.5 to 1.5 per cent, and is the first time the central bank has forecast the possibility of negative inflation, or deflation, since 2009.

    MAS core inflation, which is seen as a better gauge of out-of-pocket expenses for households, is expected to come in between 0.5 and 1.5 per cent this year, down from an earlier forecast range of 2 to 3 per cent.

    The policy adjustment is "consistent with the more benign inflation outlook this year, and appropriate for ensuring medium-term price stability in the economy", MAS said in a statement.

    At its last meeting in October, MAS maintained its policy of Singdollar appreciation. Since then, however, global oil prices have fallen even more sharply.

    The policy shift signals that the central bank sees less risk of inflation staying elevated - and thus less need to keep the Singdollar strong, economists said.

    Barclays economist Leong Wai Ho said the move was a "big adjustment in inflation expectations and tiny adjustment in policy".

    JP Morgan economist Benjamin Shatil said the growth outlook this year, while modest, "is clearly still some way from the recessionary environment of 2001", when MAS last implemented an unscheduled policy shift.

    "The decision to move policy between meetings underscores the degree to which the central bank has been surprised (by lower inflation)."

    MAS reaffirmed its forecast for the Singapore economy to grow 2 to 4 per cent this year.

    Mr Leong added that the surprise policy shift is not expected to have significant impact on economic growth. "When the United States, Europe and Japan start recovering...that stimulus will be more significant than any lift from monetary policy."