The Monetary Authority of Singapore (MAS) yesterday eased its policy stance to help the economy brace itself for a deep recession due to the coronavirus outbreak.
In a widely expected move, the central bank reduced the Singapore dollar's rate of appreciation to 0 per cent.
In recent years, the Singdollar has been allowed to appreciate mildly against a basket of currencies.
The central bank also effectively lowered the mid-point of its currency band downwards, suggesting that it will allow for a weaker exchange rate to support export-driven growth.
The last time MAS lowered the band's centre was during the global financial crisis in 2009.
It was also the first time since at least 2001, when the first monetary policy statement was released, that MAS has taken both policy measures together.
The MAS move will stabilise the exchange rate and help businesses access badly needed credit to tide over the deteriorating economic conditions at home and abroad.
MAS uses the Singapore dollar's nominal effective exchange rate (S$Neer) as its main policy tool rather than interest rates because Singapore is a small and open economy heavily dependent on trade.
The S$Neer is the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies of the nation's major trading partners.
MAS said in its policy statement: "With the deterioration in macroeconomic conditions and expectations of a weaker outlook, the S$Neer has depreciated to a level slightly below the midpoint of the policy band."
MAS said it will adopt a 0 per cent per annum rate of appreciation of the policy band starting at the prevailing level of the S$Neer. There will be no change to the width of the policy band.
"This policy decision hence affirms the present level of the S$Neer, as well as the width and 0 per cent appreciation slope of the policy band going forward, thus providing stability to the trade-weighted exchange rate," MAS said.
The Singapore dollar has been volatile in the past weeks, along with global financial markets.
The currency hit a low of 1.4650 versus the United States dollar on March 23, before rebounding to 1.4268 last Friday.
The Singapore dollar traded marginally lower against the greenback after the policy statement yesterday. Later in the day, it recovered to around 1.4262, up 0.04 per cent from its previous close.
The MAS move was also in line with the deteriorating global economic outlook and comes after other central banks embarked on a wave of monetary policy easing to calm volatile financial markets.
"The Covid-19 pandemic has led to a severe contraction in economic activity both in Singapore and globally due to the combination of supply chain disruptions, travel restrictions imposed in many countries and a sudden decline in demand," MAS said yesterday.
"The Singapore economy will enter a recession this year, with gross domestic product growth projected at minus 4 per cent to minus 1 per cent," it added.
MAS said its stable monetary policy stance also reflects the primary role of fiscal policy in mitigating the economic impact of Covid-19.
Given the rapid deterioration of the economic outlook, Singapore announced a supplementary budget of about $48 billion last week.
That was in addition to the stimulus package of $6.4 billion in the Budget unveiled last month, and puts the total at $55 billion.
MAS said the two Budget aid packages will help preserve jobs, while its money market operations will provide sufficient liquidity to the financial system.
Monetary policy will complement these efforts and ensure price stability over the medium term, it added.
DBS Bank's FX strategist Philip Wee said: "Lowering the Singapore dollar Neer would help to loosen financial and lending market conditions. For corporates, this would help cushion the impact from the coronavirus on profitability and credit spreads."
He said that the Singapore dollar may have seen its weakest level for 2020.
In year-to-date terms, it has depreciated 8.2 per cent against the US dollar so far this year. The only year that the local dollar weakened more than 10 per cent was during the 1997-98 Asian financial crisis.
Unless the present situation takes a turn for the worse, the Singapore dollar has scope to trade above the 1.40 level in the second half of 2020 in a post-coronavirus recovery, Mr Wee said.