Singapore's central bank on Thursday stunned the markets and economists, saying that it would allow its currency to appreciate to rein in inflation even as GDP growth slowed in the fiscal third quarter.
The Monetary Authority of Singapore said today that it would widen the band in which it lets the Singapore dollar trade in order to cope with global market volatility, propelling the currency to a record high.
It also increased the slope of the trading band but kept the centre unchanged, sparking a rally in the Singapore dollar to as high as S$1.2886 per US dollar from S$1.30 before the announcement.
The island’s currency has gained 8.5% this year, making it the third-best performing currency in Asia (ex-Japan).
The steeper slope will allow a faster pace of appreciation while the wider band will address the increased volatility in the market.
The Monetary Authority of Singapore said that it would continue to seek a modest and gradual appreciation in the currency.
Singapore uses its currency rather than a benchmark interest rate as its main tool to manage inflation. Most economists had expected the central bank to defer a plan to strengthen its currency.
At its April monetary policy review, the Monetary Authority of Singapore had said that it would shift the Singapore dollar to a stronger range to trade in. Its move today is effectively a form of monetary tightening and reflects concerns about domestic inflation.
Singapore’s inflation accelerated to an 18-month high of 3.3% in August. The central bank expects inflation to rise to about 4% by the end of 2010 and stay high in the first half of 2011.
Singapore’s move is in stark contrast with other Asian nations who have recently taken steps to curb appreciation in their currencies so as to protect their exports amid a slowing global economy.
Singapore's GDP growth slowed to 10.3% yoy in the third quarter versus expectations of 10.8%. That compared with a revised 19.6% expansion in the previous three months.
GDP shrank at a 19.8% annual rate in the third quarter from the previous three months after climbing by a revised 27.3% in the April-to-June period, the Trade Ministry said. The decline compared with a fall of 15.7% forecast by economists.
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