Singdollar gets surprise tweak in January 2015 as oil changes the landscape

It will appreciate slower as inflation eases; interest rates tipped to rise
By Chia Yan Min, The Straits Times, 29 Jan 2015

IN A surprise move, the central bank has acted months ahead of its scheduled meeting to tweak its exchange rate policy and ease the rise of the Singapore dollar.

The almost unprecedented step was prompted by plunging oil prices, which have quelled inflation and eased the need for a strong Singdollar to combat rising prices.

After the 8am announcement by the Monetary Authority of Singapore (MAS), the Singdollar slid as much as 1.1 per cent against the greenback yesterday.

Interest rates also started creeping up. The trend is expected to continue, and could see mortgage payments rise in the months to come, economists said.

MAS also dramatically cut its inflation forecasts for this year yesterday, on the back of plunging oil prices.

This was the first time since the dot.com bust in 2001 that MAS adjusted monetary policy outside of its regular meetings in April and October each year.

Economists said it was the first unscheduled move in recent memory outside of a crisis. Plunging oil prices provided the trigger, falling from US$85 a barrel in November to US$49 now.

MAS said it will maintain the modest appreciation of the Singdollar against a basket of other currencies, but seek to reduce the pace at which it strengthens.

MAS uses the exchange rate as its main tool to strike a balance between controlling inflation from overseas and laying the foundations for economic growth.

A stronger currency helps counter inflation as imports are cheaper in Singdollar terms. On the other hand, a weaker Singdollar helps exporters whose goods become less expensive in foreign markets.

Falling oil prices have made fighting inflation less of a priority as falling oil prices make other goods cheaper.

MAS now expects inflation to come in between negative 0.5 per cent and 0.5 per cent this year.

This is down from earlier estimates of 0.5 per cent to 1.5 per cent, and is the first time the central bank has forecast the possibility of negative inflation, or deflation, since 2009.

MAS core inflation, which is seen as a better gauge of out-of- pocket expenses for households, is expected to come in between 0.5 per cent and 1.5 per cent this year, down from an earlier forecast range of 2 per cent to 3 per cent.

At its meeting last October, MAS maintained its policy of Singdollar appreciation. Since then, however, global oil prices have fallen even more sharply.

Barclays economist Leong Wai Ho said the move was a "big adjustment in inflation expectations and tiny adjustment in policy".

JP Morgan economist Benjamin Shatil said the growth outlook this year, while modest, "is clearly still some way from the recessionary environment of 2001", when MAS last implemented an unscheduled policy shift.

MAS has reaffirmed its forecast for the Singapore economy to grow 2 per cent to 4 per cent this year.

"The decision to move policy between meetings underscores the degree to which the central bank has been surprised (by lower inflation)," said Mr Shatil.

Economists also pointed out that had no action been taken till April, speculators could have started betting against the Singdollar, and it would have been costly to counter those bets.

Many expected the move, not the timing
MAS' move to slow Singdollar's rise could aid economic growth: Experts
By Chia Yan Min, The Straits Times, 29 Jan 2015

ALTHOUGH market watchers were caught off guard by the unusual timing of the central bank's monetary policy announcement yesterday, the decision itself was not unexpected.

Some economists had already flagged the possibility that the Monetary Authority of Singapore (MAS) might allow the Singapore dollar to appreciate more slowly, but none had tipped that it would move before its next scheduled policy meeting in April.

Yesterday's announcement also implies that the authorities are shifting their focus away from inflation, which has recently fallen from elevated levels.

Their move to slow the rise of the Singdollar could potentially help economic growth, which is expected to suffer this year from a tepid global outlook.

A stronger Singdollar combats imported inflation, but hurts exporters and may deter tourists, thus crimping the local economy.

"Singapore has been losing market share to Asian peers in the electronics and components space, and a stronger Singdollar, while other Asian peers are weakening, further erodes that competitiveness," noted ANZ economist Ng Weiwen.

There were already signs before yesterday's announcement that change was afoot, especially since negative inflation rates starting appearing for the first time in five years.

Consumer prices fell 0.3 per cent in November over the same month in 2013 and 0.2 per cent in December from the same month a year earlier.

This brought inflation for last year to just 1 per cent, less than half of the 2.4 per cent recorded in 2013 and the lowest since 2009.

But MAS' "unscheduled" action may also signal that the central bank was itself surprised by the rapidity of the recent drop in inflation.

The dramatic plunge in oil prices, which began after MAS' last regularly scheduled meeting in October, spurred it to act.

Domestic factors have also played a part in reducing inflation.

While underlying cost pressures stemming from a tight labour market have remained, the extent to which companies have passed on these higher costs to consumers has been limited, MAS said.

Enhanced medical subsidies, including those under the Pioneer Generation Package, have also led to a one-off reduction in the prices of health-care services.

Without inflationary pressures to worry about, MAS can afford to let the Singdollar ease a bit, which would favour economic growth, economists said.

In fact, it is likely that MAS had already been allowing the Singdollar to trade at the lower end of its range before the official announcement, said Credit Suisse economist Michael Wan.

MAS' unscheduled move is likely to be a one-off action, attributed to "abnormal circumstances" triggered by cheaper oil, said Barclays economist Leong Wai Ho.

Given that MAS had cut its inflation forecasts for the year, it would have been "imprudent" to wait until April to adjust monetary policy, Mr Leong added.

"Markets would have started to speculate and make significant Singdollar bets, and for MAS, intervening against those bets would have been prohibitive," he said.

Other economists have questioned the timing and unexpectedness of the move.

Bank of America Merrill Lynch economist Chua Hak Bin said it is still not entirely clear why a change in the inflation outlook, with no significant change in the growth outlook or pressure on the currency trading bands, should warrant an unscheduled policy adjustment.

"Having unscheduled moves might invite greater speculation and foreign exchange volatility even during periods which are far from the April and October policy meetings," said Dr Chua.

He suggested more frequent policy updates to keep the market informed of MAS' views.

Sibor rises as MAS eases monetary policy
By Mok Fei Fei, The Straits Times, 29 Jan 2015

SOME mortgage repayments will hurt a little more after a benchmark interest rate here rose yesterday, as the central bank made a surprise move to tweak its exchange rate policy.

The three-month Singapore Interbank Offered Rate (Sibor) is used to set many floating-rate home loans here. Banks add their margin to Sibor for these loans.

Sibor rose to 0.65289 per cent yesterday, a 1.3 per cent jump from Tuesday's 0.64429 per cent.

The Monetary Authority of Singapore (MAS) unexpectedly announced yesterday that it would slow the appreciation of the Singapore dollar.

It led to the Singdollar dropping to as low as 1.357 against the United States dollar, its weakest level since August 2010 and a 1.1 per cent increase from Tuesday's close of 1.3426.

MAS directly controls only the exchange rate and not interest rates here, but a weaker Singdollar can lead to capital outflows and cause interest rates to rise.

"Effectively, the move will keep short-end domestic rates elevated," said Credit Suisse economist Michael Wan.

Home owners would feel the pinch, with Morgan Stanley analysts noting that each 25 basis points increase in Sibor would add 3 per cent to a mortgage borrower's monthly payments.

Economists, however, noted that any significant hike in Sibor in future will more likely be affected by the expected increases in US interest rates rather than the MAS move.

Despite the rise in Sibor, Mr Donald Han, managing director of property consultancy Chestertons, said home owners should be able to stomach the increase.

"The days of low interest rates are over, but the effect of the TDSR (total debt servicing ratio) would have weeded out borrowers who have been over-leveraged."

Mr Han added that those who bought homes after the TDSR went into effect would still be able to make repayments if current floating home loan rates of around 1.5 per cent and 1.8 per cent rise to between 2.5 per cent and 3.5 per cent.

The TDSR limits a borrower's overall monthly debt repayments to no more than 60 per cent of his gross monthly income.

Even though a cheaper Singdollar makes investments here more attractive for foreigners, Mr Han does not expect them to return to the property market as cooling measures have not been relaxed.

CIMB research head Kenneth Ng said the bigger problem facing the property market is not a rise in interest rates, but vacancy rates.

"We are in the second year of a four-year cycle of an avalanche of supply, and the vacancy rate has risen from about 5 per cent a year ago to around 8 per cent to 9 per cent now," he said.

Exporters may get lift but worries remain
By Marissa Lee, The Straits Times, 29 Jan 2015

EXPORTERS here may get a lift from the central bank's surprise move to slow the rise of the Singapore dollar, but they are not cheering just yet.

Some firms here are concerned that any gains from a Singdollar that is more trade competitive may not be enough to cushion falling demand in ailing Europe, for instance.

Still, the move is set to help exports to markets such as the United States, whose dollar has been rising of late as the economy there rebounds. A weaker Singdollar broadly makes exports more competitive.

"I don't see a great impact at the moment," said Mr Lim Meng Huat, deputy chief operating officer of ornamental fish exporter Apollo Aquarium.

"A lot still depends on the global economic outlook - Europeans are not buying more fish, so that could be a big challenge."

A slower rise in the Singdollar may also have little impact on the local currency's recent strengthening against the euro, some exporters said.

The euro is under pressure, with concerns that Greece's new far-left government may increase the risk of the country exiting the euro zone.

Still, other developments are proving helpful for Singapore firms looking to Europe.

Mr Gary Lee, deputy general manager for export sales and marketing at Tee Yih Jia Food Manufacturing, believes that the recent finalisation of the European Union-Singapore Free Trade Agreement puts the firm in an "okay situation".

Mr Lee has been told that his exports to Europe will benefit from zero duties in the next quarter, lifting the firm's price competitiveness there.

In a surprise announcement yesterday, the Monetary Authority of Singapore (MAS) said it would ease monetary policy in the wake of a crash in global oil prices.

This has quelled inflation and given the central bank scope to ease monetary policy.

MAS manages the Singdollar against a basket of currencies of major trading partners, though the exact weightings are not disclosed.

The MAS move could send the Singdollar trading towards the $1.40-level over the next six months, from $1.35 per US dollar now, United Overseas Bank said in a research note.

Mr Jimmy Soh, deputy president of the Singapore Food Manufacturers' Association, said this could go two ways.

"A lot of food manufacturers import raw materials from neighbouring countries, but these raw materials, like soya beans and palm oil, are denominated in US dollars. Our imports will become more expensive," he said.

Mr Ronnie Wong, chief operating officer of the Association of Electronic Industries in Singapore, also called the impact of currency movements on the industry "marginal" because both exports and imports are typically priced in US dollars.

Firms here may face financing pressures soon if interest rates rise together with expected US Federal Reserve rate hikes, said MAS, noting that Spring Singapore offers various financing schemes.

Move could hit students abroad but not Singapore travellers
By Cheryl Faith Wee, The Straits Times, 29 Jan 2015

THE weaker Singapore dollar is not likely to dampen travel sentiment or drive up travel package prices for the next few months at least, but those studying abroad might feel the pinch.

Travel agencies Chan Brothers Travel and CTC Travel said their package prices will stay the same until September this year as advertising and promotion had already been done based on those rates.

Said Ms Jane Chang, head of marketing communications for Chan Brothers Travel: "If there are any changes due to the weakening of the Singapore dollar, we might see an impact in the last quarter of the year."

Other travel agents said cost increases might balance out. Factors such as lower airfare, fuel charges and other currency fluctuations might even out the costs to consumers and travel companies, said Ms Sylvia Tan, vice-president of marketing and public relations at CTC Travel.

Similarly, Ms Alicia Seah, director of marketing communications at Dynasty Travel, said if travel demand starts to slow, airlines might lower fares.

Free and easy travellers are likely to face higher costs, but travel sentiment in general should stay strong as price hikes do not usually deter Singaporeans, said agents.

"At most, they might cut down on their spending overseas, or go for a moderately priced tour instead of a premium one," said Ms Eva Wu, spokesman for SA Tours.

After the Monetary Authority of Singapore announced changes to its currency policy yesterday, the Singapore dollar dropped to 1.357 against the US dollar - the lowest since August 2010, although it rose slightly later in the day.

While this has minimal impact on travellers for now, students who live in countries such as the United States or Australia are likely to face rising costs.

As of 8.45pm yesterday, the Singapore dollar fell by about 1 per cent against the Australian dollar.

Ms Nicole Niam, 21, who starts a three-year postgraduate course in Australia next month, needs about A$80,000 to A$90,000 (S$85,000 to S$96,000) for living expenses over three years. It will now cost her roughly $300 more per year.

"This will not have much of an impact on my lifestyle," she said.

For others, the extra costs have bigger consequences.

Ms Chong Qiaoxing, 27, who is more than half a year into a two- year master's course in the US, had planned to exchange a five- figure sum in US dollars for her living expenses and tuition fees in August to last her till next year. This is likely to cost her about $5,000 more now, compared with last year.

"I already live frugally because studying abroad is expensive and every cent counts. Food portions are big here, and I can split lunch and take away the rest for dinner.

"Now, I might have to delay exchanging the currency and maybe think twice about going on holidays during my breaks. I hope my part-time job can help cover living expenses till then," she said.

MAS move timely to tackle threat of 'hot money'
Economists flag possibility of excessive capital inflows and low inflation here
By Yasmine Yahya And Marissa Lee, The Straits Times, 30 Jan 2015

A MOVE by the Monetary Authority of Singapore (MAS) yesterday to ease its monetary policy came as a considerable surprise.

However, the unscheduled intervention is actually well- timed as it puts Singapore in a better position to deal with the threat of speculative "hot money" inflows from abroad and low inflation at home, economists said.

The regulator said it would tweak its exchange rate policy to slow the appreciation of the Singdollar - the first time since 2001 that the MAS has adjusted monetary policy outside biannual regular meetings in April and October.

Yesterday's was also the first off-cycle move in recent memory outside of a crisis, economists noted, and could signal a downshift in the central bank's growth expectations for Singapore.

HSBC economist Joseph Incalcaterra said MAS had "significantly altered" its inflation forecasts before without changing its monetary stance. Yesterday's move thus implies that the MAS has "strong concerns about growth and disinflation", he said.

But economists do not believe this should be taken as a portent of gloom. "Oil is a massive stimulus for the world economy and the benefits will accrue to us later in the year, in exports," said Barclays economist Leong Wai Ho.

Rather, MAS' intervention is timely given the very sharp, prolonged drop in global oil prices.

This factor coming ahead of MAS' next scheduled meeting in April had rendered the bank's inflation forecasts too high, said Mr Leong, and the "main motivation" behind yesterday's announcement was to revise inflation forecasts downward. The concurrent adjustment to the policy setting was "tiny", he added.

The MAS said yesterday that it now expects inflation to come in between -0.5 per cent and 0.5 per cent this year, down from earlier estimates of 0.5 to 1.5 per cent.

"If they had waited until April to adjust inflation forecasts, it would be clearer to many observers that their inflation forecasts would be out of sync," said Mr Leong, adding that this in turn might have precipitated more bets in the market for a larger easing, and more intervention.

ING economist Tim Condon said the Singdollar's slower pace of appreciation will enable MAS to hit its revised inflation target.

"The policy target is inflation, and the Singdollar is the instrument," he said.

Bank of Singapore's senior currency strategist Sim Moh Siong noted that as a small, open economy, Singapore is rightly concerned about slower global growth that is not strong enough to push inflation higher.

Other emerging market economies that are also facing low inflation - "lowflation" - will likely pursue similar strategies of slowing down their currencies' appreciation or devaluing them, he said.

Within Asia, he noted, inflation is slowing not just in Singapore but also in South Korea and China.

United Overseas Bank economist Francis Tan also flagged hot money as a possible reason for MAS' decision to act - the possibility of "huge and excessive" capital inflows that may result in another round of asset price inflation here, which he believes the MAS wants to pre-empt.

The consensus is that the US Federal Reserve will start interest rate normalisation this year, and "since Singapore adopts the exchange rate monetary policy, it is effectively importing the monetary policy stance of the US," Mr Tan wrote in a note yesterday.

The Singdollar could then stand out more strongly against other regional currencies - so, had the MAS not acted to slow the Singdollar's rise, Singapore would likely have seen another round of hot money flowing in, he said.

The move comes as several central banks around the world are taking similar steps to deal with low inflation, including interest rate cuts in India, monetary loosening in China and South Korea, the removal of a currency peg in Switzerland and major quantitative easing in the euro zone.

It has got some economists talking of a currency war. At a recent media briefing in Singapore, HSBC chief economist Stephen King said: "How do you get growth going when the world is this weak and each country is trying to do the same thing, which is to devalue their currency?

"The devaluation simply shifts the deflationary risk from one part of the world to another."

But ING's Mr Condon said the ongoing currency war is one that Asia will likely benefit from, as it comes amid a strong US dollar.

This allows central banks in the region to "enjoy the quiet life" as it means low inflows of hot money and more competitive exports.

"Since the US dollar began appreciating against major currencies in July last year, the Singdollar has depreciated 8 per cent against the US dollar, third-most in Asia after the ringgit and yen. I think the MAS has been enjoying the quiet life. The policy change means it will continue to do so."