Singapore revalues currency, anticipates China move

Reuters in Singapore
14 April 2010

Singapore’s central bank aggressively tightened its monetary policy on Wednesday by effectively revaluing the Singapore dollar, saying the economy has fully recovered from its worst ever recession.

The central bank also switched to a policy of modest and gradual appreciation for the Singapore dollar, which climbed to a 20-month high after the stronger-than-expected move.

Other Asian currencies, such as Malaysian ringgit, also rose after the decision reflecting speculation that Beijing could also let its yuan currency strengthen to deal with the threat of inflation.

Beijing has effectively frozen the yuan in mid-2008 to help its exporters weather the global crisis and speculation is rife it will let it off the leash soon with the Chinese economy operating at full throttle again and price pressures building up.

“Obviously the view is that growth is no longer an issue and it’s time to refocus on inflation,” said Tim Condon, an economist at ING Financial Markets in Singapore.

“To some extent this could be a validation of what they are anticipating is going to be coming out of Beijing within the next, I suppose, three months.”

Some analysts see Singapore’s aggressive monetary policy tightening as a move to pre-empt likely upward pressure on its dollar and other Asian currencies given widely held expectations that China will revalue the yuan.

Singapore’s monetary authority shifted its currency’s trading band up, in an effective revaluation, and also said it would allow its modest and gradual appreciation in the future.

The double dose of tightening, more than many in markets had expected, shows the central bank is bent on curbing inflation and asset bubbles as the economy roars back, but also possibly reflects its view on how markets will behave in the months ahead.

Singapore targets its currency rather than interest rates to adjust its policy and while Beijing has a greater choice of policy tools, markets believe it will also allow its yuan to rise to contain inflationary pressures in an accelerating economy.

Beijing has effectively pegged the yuan to the dollar since the middle of 2008 to help the economy weather the global downturn, but markets now anticipate that policymakers will release the shackles on the currency perhaps via a one-off revaluation.

So, as the Singapore dollar hit a five-month high against the US dollar after the policy announcement, other Asian currencies considered proxy trades for the yuan including the Malaysian ringgit and the South Korean won, also rose.

“To some extent this could be a validation of what they are anticipating is going to be coming out of Beijing within the next, I suppose, three months,” Tim Condon, an economist at ING Financial Markets, said about Wednesday’s policy move.

The policy decision coincided with data that showed the economy grew a stronger-than-expected 13.1 per cent in the first quarter from a year earlier, the biggest expansion in 16 years, which the central bank said meant it had rebounded fully from the downturn.

Data on Thursday is expected to show that China’s economy grew 11.5 per cent in the first quarter from a year earlier, which would be the strongest expansion since the third quarter of 2007.

The pace of the Singapore recovery has sparked concerns about a bubble developing in the city-state’s property market. The chief of its biggest bank DBS Group said this week property asset bubbles have already formed in Singapore, Hong Kong and China.

Economists said the central bank, which decides policy twice-yearly and next meets in October, is unlikely to further tighten policy unless the economy returns to the boom years seen before the financial crisis.

Singapore’s policy decision coincided with news that the economy expanded by a bigger-than-expected 32.1 per cent seasonally adjusted annualised rate in the first quarter, the highest since records began in 1975. The government also lifted its this year growth forecast to 7-9 per cent from 4.5-6.5 per cent.

“The Singapore economy has rebounded from the downturn and is expected to continue on its firm recovery path…at the same time, inflationary pressures are likely to pick up,” the Monetary Authority of Singapore (MAS) said in a statement.

The central bank only sets policy twice a year and manages the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates. It re-centred this band to the prevailing exchange rate level, which was in the upper half of the band.

Economists said this meant the currency had been revalued by between 1.2 and 1.4 per cent.

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