by Ryan Huang Wenwu
04:46 AM Aug 19, 2011
SINGAPORE - The Monetary Authority of Singapore (MAS) has come out to say that its current policy stance of allowing the Singapore dollar to strengthen remains appropriate and that interest rates in the city-state are determined by the market and influenced by global liquidity conditions.
In response to media queries regarding recent interest rate movements, including a negative reading on the Singapore dollar swap offer rate (SOR), the central bank said: "Singapore's domestic money markets continue to function in an orderly manner and MAS has had no need to undertake any extraordinary measures."
SOR is a derived rate for borrowing the Singapore dollar in the forward market through a foreign-exchange swap transaction. The rate, against which many corporate and mortgage loans are benchmarked, fell to a record of minus 0.6987 per cent last week.
CIMB economist Song Seng Wun said: "Banks may say what they use to price mortgage loans is now not applicable, and they may have to switch to an alternative rate based on the Singapore InterBank Offered Rate (SIBOR), for instance, which is much more practical because at least it is still in positive territory, although it is still rather low at this point."
Part of the downward pressure on SOR has come from higher capital inflows to triple-A rated Singapore. These have taken on added urgency since Standard & Poor's downgraded the United States' long-term credit rating on Aug 5, with the US Federal Reserve's pledge the following week to keep rates near zero for at least until mid-2013 also lending impetus.
In its statement yesterday, the MAS said that some investors had sought the safety of short-term cash deposits because of the turmoil in global markets. It added that the forward market has shown this with the SOR turning negative, "reflecting market expectations of the exchange rate".
MAS said its policy stance remained as that announced in its April 2011 statement. In April, the central bank effectively allowed the Singapore dollar to appreciate against a basket of currencies by re-centring the currency's band upwards.
The MAS uses exchange rates rather than interest rates to maintain price stability as Singapore's exports dwarf the country's small economy. Its next policy statement is due in mid-October.
Via: http://www.todayonline.com/Hotnews/EDC110819-0000272/MAS-continues-current-policy-of-maintaining-strong-Spore-dollar
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