On the back of strong economic growth, the Monetary Authority of Singapore (MAS) will allow the Singapore dollar to rise in the first tightening of its exchange rate-based monetary policy in six years.
In its policy statement on Friday (Apr 13), MAS said it would slightly increase the slope of the Singapore dollar's policy band from zero per cent previously, while keeping the width and mid-point of the band unchanged.
"This policy stance is consistent with a modest and gradual appreciation path of the S$NEER (Nominal Effective Exchange Rate) policy band that will ensure medium-term price stability," the authority said.
"The Singapore economy is likely to remain on its steady expansion path in 2018," said MAS, after the Ministry of Trade and Industry announced a GDP growth of 4.3 per cent in the first quarter of this year - up from 3.6 per cent in the previous quarter, according to advance estimates.
MAS said the adjustment takes into account the "uncertainty in macroeconomic outcomes presented by ongoing trade tensions", adding that it will continue to closely monitor economic developments.
The MAS manages monetary policy through exchange rate settings, rather than interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners within in an undisclosed policy band based on its nominal effective exchange rate.
OPTION TO TIGHTEN FURTHER STILL "ON THE TABLE": ANALYST
The MAS' tightening takes it away from a "neutral" stance adopted two years ago, a setting it has resorted to in the past when the global economy deteriorated, including an 18-month period from October 2008 during the global financial crisis.
The Singapore dollar briefly rose by as much as 0.3 per cent after the policy decision, but quickly pared its gains. It was last steady on the day at S$1.3119 per US dollar.
"The market reaction has been fairly muted for now, with the USD/SGD still hugging the 1.31 handle today," Ms Selena Ling, head of treasury research and strategy at OCBC, told Channel NewsAsia.
"Given that market players will be attempting to triangulate if the slight increase in slope portends a 0.5 per cent per annum appreciation pace, we may see the S$NEER drift towards the October monetary policy statement in a path consistent with a modest and gradual appreciation path ... Our year-end USD/SGD forecast is 1.2868."
She added that people are concerned about global trade tensions and "where the broader dollar is actually heading for". "As we get closer to the June FOMC (Federal Open Market Committee), I suspect some of the market attention will revert back to the expected 25-basis-point hike by the Federal Reserve, that could again, I suspect, put upward pressure on the domestic SIBOR (Singapore Interbank Offered Rate)."
Mizuho Bank senior economist Vishnu Varathan said that the option for MAS to steepen the slope again remains on the table, although given that uncertainty remains, they are likely "probably going to wait and watch".
Continuum Economics' chief economist Jeff Ng predicted that MAS will increase the slope slightly in October.
"There is continued pressure on core inflation and (it) will continue rising. MAS seems pretty firm on the decision based on their tone and overall stance seems neutral," he said.
"For immediate effects, we see it as a profit-taking move as the Singapore dollar has weakened. And we will likely see the Singapore dollar drop below 1.3 by end of the year."
Ms Ling, however disagreed, describing the statement as "fairly cautious".
"I really don't think there is a need to tighten in October at this juncture," she said. "Compared to other Asian central banks, MAS is already ahead of the curve and is moving from a neutral to a slightly more tightening stance."