THE Monetary Authority of Singapore may shift its stance on the Sing dollar in its closely watched twice- yearly policy statement - expected next week - to boost the economy amid the worsening growth outlook, economists here say.
They expect MAS to signal a slower long-term pace of appreciation for the currency against its major counterparts by reducing the slope of the undisclosed policy band for the trade-weighted Sing dollar or S$NEER, or even shifting to a neutral stance, with no official preference for a strengthening of the currency.
Either move would likely trigger a weakening of the Sing dollar from current levels, providing relief to exporters here and cushioning the blow of slowing demand in some of Singapore's biggest trading partners.
Economists at Credit Suisse in Singapore believe that MAS will move to cap the Sing dollar's recent gains against major currencies such as the US dollar.
The 'most likely scenario' is that MAS re-centres its policy band for the S$NEER at a lower level, Credit Suisse economists Cem Karacadag, Kun Lung Wu and Colin Teo said in a report this week.
That would effectively reverse MAS's action in April when it raised the entire policy band, giving the Sing dollar a one-time boost to combat soaring inflation, they said.
'We also think MAS will simultaneously lower, but not eliminate, the slope of the policy band,' they added. The two moves in combination 'would signal and create much more room for S$NEER depreciation than appreciation over the next several months'.
Kit Wei Zheng, an economist at Citigroup in Singapore, said that MAS may even reduce the slope of the band to zero, moving away from its policy of encouraging a 'gradual and modest' appreciation of the currency that has been in place since April 2004.
'MAS will likely shift to a neutral policy stance, with a good chance of a more drastic downward re-centring of the policy band,' he said in a report this week.
Since the last monetary policy statement in April, the pace of inflation here has slowed, falling to 6.4 per cent in August from a 26-year high of 7.5 per cent in April-June, as measured by the change in the consumer price index from the same months a year earlier.
Meanwhile, worries over the impact of slowing economic growth in Singapore's biggest export markets of the US, Europe and the rest of Asia are increasing, especially with doubts still remaining over the massive rescue package aimed at bailing out the American financial sector.
But analysts at Standard Chartered Bank believe that with inflation still running at above 6 per cent, MAS will be cautious about easing monetary policy too rapidly.
Unless there is a sharp drop in the Sing dollar's value before the official policy statement - expected next Friday - 'it is unlikely that MAS will combine the reduction in the slope of the policy band with a re-centring', Stanchart analysts Tai Hui, Alvin Liew and Thomas Harr said in a report this week.
Unlike the US Federal Reserve, which sets interest rate targets, MAS implements its monetary policy by steering the exchange rate of the Sing dollar against the currencies of Singapore's major trading partners. By adjusting the position, width or slope of a tolerated policy band for the exchange rate, MAS influences the size, direction and pace of change in the Sing dollar against other currencies.
This article was first published in The Business Times on October 03, 2008.
