Singapore’s central bank said the economy has fully recovered from its worst ever recession but warned inflationary pressures are likely to pick up, moving the currency band up and switching to a policy of modest and gradual appreciation.
The bank managed the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates. It re-centred the band yesterday to the prevailing exchange rate level, which was in the upper half of the band.
The decision came as Singapore said its economy had expanded by 32.1 per cent on a seasonally adjusted annualised basis in the first quarter, faster than expected and the highest rate of growth since records began in 1975. The central bank lifted its inflation projection to between 2.5 and 3.5 per cent for 2010, and its 2010 GDP forecast to between seven and nine per cent. Singapore’s currency revaluation means speculation is now rife that China will also follow in its footsteps, after Beijing effectively froze the yuan in mid-2008 to help its exporters weather the global crisis.
“China has been expected to allow a yuan revaluation. Today’s Singapore step reignited the prospect among investors,” said Kim Jae-eun, economist at Hyundai Securities. “Singapore’s step may be used as an excuse for other countries such as the US to press China more on a currency appreciation.”
Inflationary pressures are now starting to build up again in China, with the country’s economy back to operating at full throttle.