The Singapore dollar will be allowed to strengthen a little faster after the central bank adjusted monetary policy yesterday, as it expects the economy to grow at a slower but steady pace amid rising trade tensions.
The adjustment means the dollar will be able to increase modestly against a basket of currencies of Singapore's key major trading partners.
That could make imports a little cheaper, given fewer Singdollars will be needed to pay for them, but exporters might find their products are more expensive for foreign buyers.
As of 4.55pm yesterday, the Singdollar gained less than 0.1 per cent to 1.3771 against the US dollar, after the announcement.
The move by the Monetary Authority of Singapore (MAS) to tighten monetary policy further, allowing the currency to move on "a modest and gradual appreciation path", was in line with expectations of 11 out of 20 analysts polled by Reuters.
They pointed to rising inflation as a reason to tighten further despite potential fallout from trade tensions between the United States and China.
This is the second time this year MAS has adjusted the dollar on an upward slope. The first was in April, marking the first monetary tightening in six years.
It said yesterday: "The Singapore economy is likely to remain on its steady expansion path in the quarters ahead, keeping output slightly above potential."
MAS added that core inflation will see modest but continuing pressures before levelling off at just below 2 per cent over the medium term.
The policy adjustment came as advance estimates out yesterday showed that the economy grew 2.6 per cent in the third quarter over the same three months last year.
That followed an average growth of 4.3 per cent in the first half of the year, according to Ministry of Trade and Industry (MTI) data.
DBS senior economist Irvin Seah said the MAS move aligns with steps taken by key central banks around the world to tighten monetary policies, usually in the form of higher interest rates.
He noted that the "gross domestic product figure has reaffirmed the fact that the Singapore economy has remained very resilient".
Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye added that MAS' concerns over managing rising core inflation may have outweighed risks to growth from the escalating US-China trade war.
MAS said imported inflation is likely to rise due to higher oil and food prices, while the stronger labour market should underpin a faster wage growth. This cost could be passed on to consumers.
But Dr Chua warned that the outlook for next year could be less optimistic, citing the trade war.
"The risk is that an abnormally strong Singdollar might hurt manufacturing, exports and... some of the service industries as well, such as tourism, and potentially investment," he said.
