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The Monetary Authority of Singapore (MAS) on Thursday, surprised the market by loosening its monetary policy. The central bank set a target of a zero per cent currency appreciation, and said that this change of stance was not aimed at depreciating the currency but preventing an upward drift.
Benign inflation outlook was the main reason cited by the central bank for the unexpected move. The central bank’s assessment said core inflation would be “milder than earlier expected”.
MAS’ instrument of monetary policy is the trade-weighted exchange rate. It manages inflation through the exchange rate rather than by controlling interest rates. SGD is allowed to float against a basket of currencies within an unspecified target band.
In today’s announcement, it shifted the slope of the band to neutral from a gradual appreciation bias previously. A flat stance on the currency was last deployed during the 2008 global financial crisis. But this time the move was pre-emptive. USD-SGD jumped by close to 1% to the 1.3630 level after the announcement.
