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In a move widely expected by analysts, the Monetary Authority of Singapore (MAS) shifted to a neutral exchange rate policy stance yesterday for the first time since April 2004.
The move came on the day Singapore sunk into a technical recession.
Citigroup economist Kit Wei Zheng said the shift in policy 'is an explicit recognition of the heightened risk of a more severe and prolonged recession'.
The neutral policy stance means the MAS will be 'targeting zero per cent appreciation' instead of its previous policy of 'modest and gradual appreciation' of the currency.
This means that although the dollar may rise or fall against individual currencies such as the greenback or Japanese yen, its value will remain roughly stable in relation to a trade-weighted average of a group of currencies.
The move will help to boost the competitiveness of Singapore's exports by making them cheaper overseas, or at least stop them from getting more expensive.
Exports have been in a steep decline. August figures showed that Singapore's exports to nine of its top 10 destinations fell from the previous year.
Mr Renny Yeo, president of the Singapore Manufacturers Federation, said the currency move was good news for manufacturers. With the cost of raw materials rising and wages increasing, it was important to arrest the appreciation in the Singdollar that was making exports more expensive, he said.
DBS economist Irvin Seah said that with slowing global demand, the move may not have a significant direct impact on exports but will still bring some relief to exporters and even to some services that are externally driven.
The shift in policy comes as the Republic enters its first technical recession in six years as the crisis that has debilitated financial institutions around the world has spilled over into the real economy and threatens a global slowdown.
Central banks in North America, Europe and Asia, all under severe pressure to free up liquidity and to fight slowing growth, have collectively sliced interest rates in recent days.
Although the rate cuts have largely had muted effects, economists widely expected MAS to follow suit by easing its exchange rate policy.
Unlike other central banks, MAS uses exchange rate policy rather than interest rate setting as its main tool.
In recent years, it has engineered policy changes through either shifting the path, recentring the mid-point of the band or changing the width of the band in which the Singdollar moves.
The last time the authority adopted a neutral policy stance was during the SARS-led downturn in 2003.
Economists have hailed the change in policy stance a 'necessary' and an 'important first step' as Singapore enters a very uncertain period.
They also believe that MAS will intervene again to guide the value of the dollar ahead of its next meeting next April and that there is a high probability the band could widen or be recentred downwards.
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