Singapore surprises with easing, clubbing currency

Singapore's central bank surprised markets with a between-meeting easing amid nearly non-existent inflation, sending the city-state's currency sharply lower.

"With material downward revision to the inflation outlook, MAS (Monetary Authority of Singapore) saw cause for preemptive action," Mizuho (Tokyo Stock Exchange: 8411.T-JP) Bank said in a note Wednesday. "On the growth front, MAS also sounded more cautious, pointing to a mixed outlook for the global economy, which is likely to weigh on the export-oriented sectors."

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Without waiting for its scheduled April review -- or today's U.S. Federal Reserve's meeting -- the MAS Wednesday announced that it was reducing the slope of the Singapore dollar's appreciation against an undisclosed, trade-weighted basket of currencies. Rather than using interest rates, Singapore sets its monetary policy by adjusting the currency's trading range. The slope was last flattened in 2011 and this was the MAS' first unscheduled policy statement since 2001.

Waning inflation

Inflation in the trade-dependent city-state has been on the wane despite rising labor shortages as the government limited the number of foreign workers. In December, the consumer price index fell 0.2 percent on-year after declining 0.3 percent in November as declining oil prices globally eased fuel costs and as housing costs were lower. The MAS cut its headline inflation forecast for 2015 to a band of negative 0.5 percent to 0.5 percent from 0.5-1.5 percent previously.

"Since 2013, the MAS has cited cost pressure from the tight labor market as the main inflation threat," ING (Euronext Amsterdam: INGA-NL) noted. "Restrictions on foreign worker numbers force employers to recruit Singaporeans, but this means paying more. It can be difficult in the short term to raise productivity sufficiently to justify higher wages so quantities adjust; the productivity drive increases the vacancy rate rather than wages."

Wednesday's move decked the Singapore dollar (Exchange:SGD=), also known as the Sing, with the U.S. dollar fetching as much as 1.3569 Sing from around 1.3381 Sing before the move, although the city-state's currency later recovered, with the U.S. dollar buying around 1.3522 in mid-morning trade.

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The local stock market was cautious in its approval, with the STI (Singapore Exchange: .FTSTI) up around 0.2 percent in mid-morning trade, while most regional markets were lower in the wake of the selloff on Wall Street overnight.

Not that surprising

Although the timing of the move was surprising, some analysts said they had expected the MAS would begin easing at its April review.

"We flagged the growing possibility of a policy shift due to strong local disinflationary pressures, sluggish domestic growth, and risks to the global outlook," Jason Daw, head of Asian foreign-exchange policy at Societe Generale (Euronext Paris: GLE-FR), said in a note Wednesday. "With these forces likely to remain in place over the coming months, a further policy adjustment (i.e. moving to a no appreciation bias) cannot be ruled out."

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Expectations the MAS may move again at its April or October reviews may spur traders to use the Singapore dollar as a funding currency, he said.

He isn't alone in expecting further pressure on the Sing.

UOB (Singapore Exchange: UOBH-SG) now expects the U.S. dollar will trade toward the 1.40 Singapore dollar level over the next six months. ANZ expects the currency pair to end the year at 1.39, up from its previous forecast of 1.37. ING put its forecast for the U.S. dollar to fetch 1.36 Sing under review for upward revision as well.

However, some expect the MAS move may be a "one-and done" step.

"All of the factors that have pushed down inflation are on the supply side, and should just have one-off effects. There is no reason to think that deflation will become entrenched," Daniel Martin, Asia economist at Capital Economics, said in a note Wednesday. He expects the low inflation will boost real incomes and domestic demand, leading to a faster take up of economic slack and noted that the MAS isn't concerned about growth, keeping a growth forecast of 2-4 percent for the year.

"Given the reasonably healthy outlook for the economy and the likelihood that inflation will rebound toward the end of 2015, we do not expect the MAS to loosen policy again when it meets in April," Martin said.

He's not alone.

"This is a massive boost for the export-oriented economy of Singapore. With a softer Singapore dollar, Singapore can now push its goods and services out more easily," Howie Lee, an investment analyst at Phillip Futures, said in a note Wednesday. "Another adjustment in April is unlikely."

-By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1