Singapore's central bank surprised markets Thursday by easing its currency policy, as data showed the city-state's manufacturing sector continued to cast a pall on economic activity.
The Monetary Authority of Singapore (MAS), which uses exchange rates to guide policy instead of interest rates like most of its global peers, said that growth in 2016 was expected to be weaker than previously estimated and that inflation was now likely to tick higher at much slower pace than anticipated.
In a statement, the MAS predicted weak external demand in the U.S., Europe and Japan, combined with China's structural slowdown, will result in "below-potential" full-year growth for trade-reliant Singapore. Moreover, oil's recent price crash could see a fall in exploration activities, which will hurt the transport and precision engineering sectors, the MAS warned.
On Thursday, the MAS set the rate of appreciation of the Singapore dollar's trading band based on a basket of currencies, called the Singapore dollar nominal effective exchange rate (S$NEER), at zero percent. Thursday's action only removes the modest and gradual appreciation path of the S$NEER policy band that was in place, the MAS said, clarifying that the move is not aimed at depreciating the domestic currency.
In reaction, the local dollar fell as much as 0.9 percent against the greenback to a three-week low of 1.3635.
Last year, the central bank allowed the Singapore dollar to rise at a "slightly" slower pace against its trading partners. The MAS moved in January 2015 to counter weak inflation amid the oil price crash and again in October as a defense against domestic and external headwinds.
Thursday's move was largely a surprise as many economists had expected the central bank to hold off on easing. The government's expanded fiscal program, unveiled last month in the 2016-2017 budget, provided the MAS with leeway to keep policy steady for a while, strategists said at the time.