Decline in Oil Prices, Cause of Singapore’s Declining Currency

Over the past six months, Singapore has been experiencing a decline in currency. As against the US dollar, the Singapore dollar dropped more than 7% (valued at 1.3570) as against the US dollar. This is its lowest point since 2010. Even in the Forex markets, Singapore appears to take a hit than most major currencies.

According to Deutsche Bank, this may be closely attributed to the recent tumble on oil prices.

Plummeting oil prices

For years, inflation and oil prices have had a very direct relationship. As oil prices go up, it is expected that inflation rate will also rise because oil appears to be a major mover in the economy. It is a source of energy needed not only to power up major businesses but also SMEs, public service, as well as private homes.

This is exactly the reason why the decline in oil prices has caused major economic challenges not just in Singapore but also in several parts of the globe.

Currently, oil prices have plummeted, and this is mainly attributed to the fact that oil production has suddenly increased, making the supply greater than the demand for it. The prices crashed because the demand in countries where oil is heavily needed has slowed down immensely.

According to big oil production companies like Exxon, these oil prices may even continue to stay low for longer period of time than people would expect.

Declining inflation rate

The inflation rate in Singapore has shifted significantly amid cheaper oil prices. Economists expected an ease in Singapore’s inflation rate and it appears that the Central Bank has the same view. The Central Bank’s inflation outlook for 2015 is currently projected at -0.5% to 0.5%, down from 0.5% to 1.5% in its previous inflation forecast. It tells the same regarding its core inflation outlook as the Monetary Authority of Singapore (MAS) predicts that the average would probably be around 0.5% to 1.5% this year, significantly different from the earlier forecast of 2% to 3%.

The effect of this declining inflation rate could be a little too discouraging, as inflation is one of the direct causes of fluctuating interest rates. Business financing and mortgage financing are both difficult to obtain because it is rather hard to predict the best time to obtain such and if it is even possible that your loans will be accepted as banks would choose to enforce certain measures to control inflation.

Central bank loosens monetary policy

The MAS has long imposed a strict exchange rate-based monetary policy which aims to focus on price stability for sustainable economic growth. Singapore’s policy has long centred on the exchange rate.

However, just this January, MAS decided to adjust the monetary policy and to loosen it up to adjust to a few changes brought about by the falling oil prices. This new adjustment would create a reduction in the slope of the policy band to be more consistent with the current outlook of the inflation rate this 2015.

By using this scheme, authorities expect an appreciation on Singapore currency and economy but at a rather slower pace.

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