Now for an example of what the Financial Times’ Lex column this morning called “grown-up policy making”.
In all the guff written this morning on the Australian dollar reaching for parity, including a re-run of the rubbish written earlier by Andrew Robb, the man who would be Joe Hockey in The Australian this morning, no one picked up on what the Singapore central bank did yesterday and how it echoes the dilemma confronting the Reserve Bank of Australia.
The central banks of Australia and Singapore are concerned about inflation, now and in the future, and already they have acted to try and slow those pressures and their economies, but have done so using very different monetary policy tools. Singapore, unlike the RBA, uses the value of the country’s dollar to transit the policy changes. We, like most other central banks, use the cost of money, interest rates.
So yesterday Singapore’s MAS (Monetary Authority of Singapore) for the second time this year, effectively increased interest rates by steepening the trading curve for the country’s dollar, and widened the trading bands to allow for greater volatility, especially after the Fed meeting on November 2-3 that is expected to see a substantial easing of US monetary policy.
It did the same in April (there are only two occasions a year when the MAS allows itself to make these sorts of changes). That and yesterday’s move were an effective tightening of monetary policy, similar to a rise in interest rates in Australia (and no, we don’t know the trading bands, the weightings or the shape of the new curve of the currency’s rise set by the MAS, although it will become self-evident in the next week or so).
The similarity with Australia is that Singapore is facing a problem with rising inflation, not the impact of the rising value of the Singapore dollar. That is another similarity with Australia, the impact of the higher currency here for the RBA is very much the secondary issue to that posed by inflation.
The inflation concern is why the Singapore dollar was pushed up at the April meeting of the MAS And why we had three rates rises earlier in the year). Yesterday, the currency rose to an all-time high against the US dollar (or rather the US dollar fell to the lowest since records started back in early 1981). The Singapore dollar has already risen by 8.5% (before yesterday) against the greenback, roughly the same as the movement by the Aussie dollar, much of which has come in the past two months.
The effective tightening of monetary policy in Singapore came even as the government revealed that the country’s economic growth slowed in the third quarter from the frenetic pace of the first two quarters.
But from what the MAS said yesterday, it’s clear that the rise in the exchange rate hasn’t been enough to put a lid on cost pressures in the island economy. Singapore’s inflation jumped to an 18-month high of 3.3% in August. The central bank forecasts price gains may quicken to about 4% by the end of 2010 and “stay high” in the first half of 2011.
The similarities with Australia are very apparent, except our inflation is also being driven by a huge boost from our terms of trade (Singapore’s is coming from strong growth throughout the economy, especially construction and manufacturing). Singapore’s inflation problem is now, ours is in 2011 and 2012.
The RBA will have the September quarter CPI data and new staff forecasts for the meeting on November 2. It will determine the course of action. A rate rise will see the dollar rise in value.
But there is another factor at play. The RBA meets a few hours before the Fed starts the two-day meeting that is widely expected to see its second round of monetary policy easing announced about 6.15am (EST) on November 4. If it does that, the value of the Australian dollar will rise, even though it has been lifted by the earlier rate rise. The RBA won’t let that worry it (and the results of the US mid-term polls will also be flowing as the Fed meets after the RBA decision, adding to the volatility levels in markets).
IF the RBA believes the Fed will ease, could it be tempted to sit and wait and see the impact of the move on the Australian dollar (every increase is like a tightening of monetary policy, as we are seeing in Singapore)? It’s quite likely the market will push up the value of the Aussie dollar even if the RBA does nothing ahead of the Fed decision. No Fed decision, then its a different story.
But as the FT said about the MAS “while squabbling governments pull each others’ pigtails, Singapore is quietly engaging in some grown-up policy making”. Singapore, in short, is doing its bit. “Who’s next?” asked the FT. Well the RBA could step up to the plate, if it sees a sign of concern in the inflation figures.
But if they are similar to the relatively benign June quarter figures (especially the RBA’s own underlying rate), then the RBA decision at 2.30pm on November 2, will probably disappoint the “Rate Rise Looms” mob, including the man who would be Joe Hockey. Or should we call him mini-budget Robb?
Footnote: There is an important distinction to be made here. Parity is only a notion, it’s not that important. The US dollar is no longer the major currency in the trade weighted index (which measures the value of the Australian dollar against 21 major currencies). It has a weighting of 8.5%, behind the euro and well behind the yuan, which is on a weighting of just over 22%. But the Australian/US dollars are important in the foreign exchange markets because the $A/$US pair is one of the most traded globally. Australian companies are big suppliers of US dollars to the forex market because of our $400 billion a year of imports and exports.