The Monetary Authority of Singapore, or MAS, has re-centered the trading band of the S$NEER, while retaining the existing policy of zero percent appreciation, without any changes to the width of the band.
In the Monetary Policy Statement released today, the MAS stated that it will re-center the exchange rate policy band to the prevailing level of S$NEER. The central bank further noted that the current level of the S$NEER is appropriate for maintaining domestic price stability over the medium term, considering the prospects for growth in the economy.
The MAS, expressing satisfaction at the resilient financial system and sound fundamentals, stated that it does not foresee any reason for the undue weakening of the Singapore Dollar against other currencies.
The announcement of the MAS has been widely anticipated by economists. According to economists, the re-centering of the exchange rate to the prevailing level of S$NEER is indirectly equivalent to a devaluation of 1.7%, as the local currency had been trading in the lower band since the implementation of a revised stance in October 2008.
The monetary authority, while acknowledging that there has been a moderation in the rate of decline in the economic activity across most of the economies, is of the view that downside risks to the growth still remains. The MAS acknowledged that unemployment is on the rise and segments of the broader credit market continue to be impaired. Considering the weaker fundamentals as well as the advance estimates of GDP for the fourth quarter, the MAS expects the Singapore economy to contract between 9% and 6% during the year 2009.
The MAS has retained the CPI inflation outlook of -1% to 0% for the full year 2009, attributing the high base in 2008 as the primary reason.
Earlier in the day, the Ministry of Trade and Industry said in a preliminary report that the economy contracted by a seasonally adjusted 19.7% quarter-over-quarter for the first three months of 2009, following a 16.9% contraction in the fourth quarter of 2008. Analysts expected the GDP to contract 9%.
On an annual basis, GDP declined 11.5% during the first quarter, much worse than expectations of an 8.9% decline.
Commenting on the central bank decision, Singapore-based DBS Research Group stated that the MAS has effectively re-centered the neutral S$NEER policy band by half a policy band. DBS further noted that the weak side of the old band has become the mid point of the band and thus, according to its model, results in an effective devaluation of 1.5% of the band.
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