Currency traders and other market watchers were taken by surprise yesterday when the central bank deployed a weapon it had used only when the country was in recession.
The Monetary Authority of Singapore (MAS) announced yesterday that it would stop the Singapore dollar from rising further against a basket of key currencies. Its hand was forced by the prospect of weaker inflation over the coming months - shorthand for saying the economy will grow at an anaemic pace.
Its announcement at 8am yesterday sent the Singdollar diving more than 1 per cent against the greenback before settling at $1.363 to one United States dollar at 8pm, from $1.35 on Wednesday.
Traders recalled that the previous occasions when the MAS flattened the slope of the Singdollar policy band to zero were in October 2008, when the world was in the middle of a global credit meltdown, and in July 2001, following the dot.com bust.
Most analysts were expecting the MAS to withhold its monetary bullets until actual data confirmed an economic slowdown. Even more so as Finance Minister Heng Swee Keat had leaned on the side of optimism in his Budget speech just three weeks ago.
Yesterday marked the third time that the central bank has eased monetary policy since January last year. But that has not stopped the Singdollar from rising 3.3 per cent against the greenback this year. Analysts are expecting more volatility, with the economy crossing into uncharted waters.
DBS senior currency strategist Philip Wee said: "In the past, if we had negative inflation, we were in a recession. This is the first time we didn't need a recession to have negative inflation."
The central bank yesterday said it expects headline inflation to remain negative throughout this year. The MAS also lowered its guidance for core inflation to come in within the lower half of the 0.5 per cent to 1.5 per cent forecast range, though it left its official forecast unchanged.
Mr Wee, who had guessed the MAS would go for zero appreciation, said: "We're not bearish, we're not calling for a recession; we just don't think that growth is strong enough to generate inflation."
The MAS said it now expects a more modest pace of growth from the US economy due to weaker investment and exports, even as its labour market strengthens. China's growth will also moderate as its growing services sector is unlikely to offset its faltering industrial activity, the MAS said.
On the domestic front, wage growth is projected to slow further. Oil prices are up but analysts have tired of calling the bottom, and there is no asset inflation.
"To have that kind of inflation (that can sustain a rising Singdollar), you need everyone to go crazy on property again... You need to have the wealth effect," said Mr Wee.
If the MAS chooses to continue on this easing cycle at its next biannual meeting in October, its next step would be to recentre the Singdollar policy band lower, analysts said.
"You tend to require a huge external shock to trigger that recentring policy," said ANZ forex strategist Khoon Goh. "But from what we've seen since this easing cycle began in January last year, it looks like the hurdle for easing isn't as high any more."