UPDATE 2-Singapore primes policy for volatility, like after 9/11

* Central bank says policy is reaction to global volatility

* Analysts cite high liquidity, more seen from QE

* Singapore increases slope of currency band

* Keeps centre of trading band unchanged

* Singapore dollar rallies to record high

By Nopporn Wong-Anan

SINGAPORE, Oct 14 (BestGrowthStock) – Singapore widened the trading
band for the Singapore dollar on Thursday for the first time
since just after the 9/11 attacks on the United States,
underlining the depth of its concern about financial markets.

Analysts said the surprise decision gave the currency more
flexibility to react to a tide of investment money hitting
emerging markets and the potential risk of a flare up in
inflation that could result.

“It is to give them more flexibility in a very uncertain
world,” said Robert Prior-Wandesforde, head of India and South
East Asia Economics at Credit Suisse.

“In other words, they could keep their currency towards the
top of the band if inflation remains problematic and growth
holds up, but also give them more flexibility to push it
downwards if growth does falter significantly.”

Singapore inflation in August was 3.3 percent, the highest
level this year.

Record low interest rates and faltering recoveries in rich
countries have pushed investors into emerging markets in search
of higher yields, driving up currencies and asset prices.

That has prompted governments to intervene in markets to
curb currency strength and to impose some controls, such as
taxes, to prevent the funds from destabilising their economies.

The Singapore dollar hit a record high after the news,
which overshadowed data showing the export-reliant economy
contracted at a record pace in the third quarter.

The news encouraged further selling of the U.S. dollar,
which fell to a 10-month low against a basket of major
currencies.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Central bank statement [ID:nSGE69D00L]

Q3 GDP falls record pace [ID:nSGC003776]

Graphic on MAS policy: http://link.reuters.com/hyq77p

USD/Asia FX graphic: http://link.reuters.com/vyg38p

PDF on global FX tensions: http://r.reuters.com/gez77p

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The Monetary Authority of Singapore, the central bank, said
the band was widened “in view of the volatility across
international financial markets”.

The MAS sets monetary policy by managing the Singapore
dollar in a secret trade-weighted band against a basket of
currencies.

It also increased the slope of the trading band but kept
the centre unchanged, effectively tightening policy. It said
the changes were also made because “the balance of risks is
weighted towards inflation going forward.”

“The widening of the policy band is more in response to the
unprecedented liquidity in global markets today and to cope
with the uncertainty and volatility,” said Song Seng Wun,
senior economist at CIMB Research.

“The world is awash with liquidity, especially when the
U.S. looks to pump even more money to keep its economy afloat.”

The last time the central bank widened the trading band for
the Singapore dollar was in October 2001, weeks after the plane
attacks on New York and Washington D.C..

RESPONSE, FLEXIBILITY

Analysts said the decision to widen the trading band could
also reflect the central bank’s need to build in more
flexibility into its policies. It schedules policy reviews just
twice a year, unlike monthly for many central banks.

Deutsche Bank said in a research note that it believed the
band had been widened to plus/minus 3.0 percent from plus/minus
2.0 percent. It said it believed the slope had been increased
to 3.0 percent from 2.0 percent.

But it added: “However, given the increased slope, the
forward curve is not pricing in the likely pace of
appreciation. Inflows into Singapore will thus continue at a
strong pace, leading to continued abundant liquidity
conditions.”

Global currency tensions, underscored by a row between
South Korea and Japan over exchange rates, dominated a weekend
meeting of the International Monetary Fund. The tensions are
also set to dominate meetings of the G20 this month and in
November.

“There was criticism at the IMF on emerging markets not
doing their part to promote economic rebalancing,” said Tim
Condon, head of research at ING Financial Markets Research.

“And I think Singapore may be susceptible…they may want
to be seen doing their part, or at least not thwarting economic
rebalancing by engaging in heavy exchange market intervention.

“They can widen the band and be demonstrating they are
prepared to allow a little bit more exchange rate volatility or
fluctuation.”

Singapore’s economy contracted a record 19.8 percent in the
third quarter on an annualised and seasonally adjusted basis,
following an exceptionally strong first half of the year when
the economy rebounded from the global financial crisis.

The government said it was maintaining a forecast for 2010
growth of 13-15 percent.

For the latest news on the policy review and market
reaction, click on [SI-CEN-RTRS-LEN]
(Writing by Raju Gopalakrishnan; Editing by Neil Fullick)

UPDATE 2-Singapore primes policy for volatility, like after 9/11