Why It Matters

Signalling faith in the economy

The strength of the Singapore dollar is likely to be cranked up a notch next year, economists say.

Such a move by the Monetary Authority of Singapore (MAS) will telegraph loud and clear its faith in the economy. It will also show that the central bank expects inflation to pick up from its relatively low levels now.

The change has been a long time coming: It was in April last year that the MAS took a zero-appreciation stance on the currency, citing "a less favourable external environment".

And that was already a significant change from the "modest and gradual" stance it adopted in 2010, after the global financial crisis.

But the tide seems to have turned for Singapore's economy this year. Private-sector economists polled by the MAS recently raised their growth forecast for this year to 3.3 per cent - a jump from their earlier 2.5 per cent prediction.

A stronger Singdollar would suggest that the country does not need to gussy up its export appeal.

Separately, while the impact of this year's water tariff hike on prices was not as dire as had been feared, another round is coming in July. There has also been chatter lately about potential tax increases.

So, if everyday prices go up, a stronger Singdollar would help counter the rise in inflation by lowering the relative cost of imports.

Singapore would not be alone if the MAS switches tack on policy.

The United States bumped up interest rates again this week, with China quickly following suit. South Korea did so last month and more economies, including Malaysia, are expected to join the party.

The central bank here is surely keeping an eye on how the Singdollar tracks against global growth.

But market watchers are divided on the timing of the policy shift. For instance, Maybank Kim Eng analysts tip a "slight tightening" in April, while the DBS research team thinks movement is more likely in October.

As the national security slogan goes, the question of a tighter monetary policy is now "not if, but when".

A version of this article appeared in the print edition of The Straits Times on December 15, 2017, with the headline 'Signalling faith in the economy'. Print Edition | Subscribe