Singapore unexpectedly revalued its currency yesterday, thereby joining China, Australia, India and Vietnam in starting to tighten monetary policy.
The surprise move by the Monetary Authority of Singapore sent the Singapore dollar sharply higher.
The move came as the government raised forecasts for economic growth and inflation for 2010.
The MAS, which uses the exchange rate rather than interest rates to conduct monetary policy, said it will seek a “modest and gradual appreciation” in the local dollar after shifting to a stronger range for currency fluctuations.
The Authority said it will “re-center the exchange-rate policy band at the prevailing level of the Singapore nominal effective exchange rate” and “shift the policy band from that of zero appreciation to one of modest and gradual appreciation”. There will be no change to the width of the band.
The Ministry of Trade and Industry said in a statement the economy will expand 9% this year, up from the previous forecast of 6.5%.
The Ministry said GDP jumped an annualised 32.1% in the first quarter of this year from the previous three months when it contracted by 2.8%.
Year-on-year, first quarter growth was estimated to be 13.1% higher than the first quarter of 2009 (which was badly depressed).
Singapore revised up its inflation target for this year from 2.5% to 3.5%, compared with the earlier forecast of 2% to 3%.
In raising its growth outlook, Singapore joined South Korea in raising its 2010 economic growth forecast.
Korea’s central bank this week said growth would be around 5.2% this year (about what the Asian Development Bank estimated this week). First quarter growth was put at 1.6%.
But while South Korea saw inflation easing, Singapore’s forecast of a rise in price pressures saw the Monetary Authority of Singapore move to push up the value of the country’s dollar by revaluing upward its undisclosed targeted trading band for the Singapore dollar and aim for a "modest and gradual appreciation" against a basket of currencies.
That way import costs will fall to take some of the pressure off inflation.
The Trade Ministry said in its statement that "While downside risks remain, such as a sovereign debt crisis in Europe or a slowdown due to withdrawal of fiscal measures, these have been outweighed by stronger signs that global economic conditions are improving.
"In view of the exceptionally strong growth for the Singapore economy in the first quarter and the overall improved outlook for external economies for the rest of 2010, MTI is upgrading the GDP growth forecast for 2010 from 4.5 to 6.5 per cent to 7% to 9%.
"The sharp rise in first quarter growth "was led by the manufacturing sector.
"The sharp improvement in performance could be attributed to two key factors – first, the robust expansion of electronics production underpinned by a strong recovery in global semiconductor chip sales; and second, a stronger-than-expected surge in biomedical manufacturing output.
"The construction sector grew by 11.3 per cent on a year-on-year basis in the first quarter of 2010, supported by sustained public sector civil engineering activities and an increase in the number of residential construction projects.
"The services producing industries also expanded, registering a year-on-year growth of 8.4 per cent. Expansion was driven largely by wholesale trade, which improved on the back of sharp increases in exports of electronic goods.
"Growth in transport and storage, hotels and restaurants as well as financial and business services also contributed to improved performance for the services sector."
