By Masayuki Kitano and Jongwoo Cheon
SINGAPORE (Reuters) - Singapore's central bank unexpectedly eased policy on Thursday after growth stalled in the first quarter, darkening the outlook for the trade-dependent economy and triggering the worst fall in the local dollar in eight months.
The move comes as the affluent city state has struggled to motor on in the face of anaemic exports, depressed external demand and low inflation - a toxic combination that has seen global policy makers scrambling to restore momentum through aggressive easings.
In its third policy easing in 15 months, the Monetary Authority of Singapore (MAS) said it will set the rate of appreciation of the Singapore dollar NEER policy band at zero percent - starting on Thursday - and shift to a neutral policy stance.
It marked the first time the MAS has moved to 'neutral' since the global financial crisis, underscoring deteriorating world growth that has spread turmoil in asset markets in the past few months and prompted central banks from Europe to Japan to China to step up policy support.
The MAS, which manages monetary policy via changes to the exchange rate rather than interest rates because trade flows dwarf the $290 billion economy, previously maintained a stance of a "modest and gradual" appreciation of the Singapore dollar.
"It's very interesting, and eye-catching, that the MAS has gone back to post-global financial crisis settings, and sends a strong message about the weak external environment," said Sean Callow, senior currency strategist at Westpac in Sydney.
"As one of the world's most trade-sensitive economies, Singapore's concern over a 'less favourable external environment' should be noted by the likes" of South Korea, Australia and New Zealand, Callow said.
The worsening external conditions over recent months have also prompted the U.S. Federal Reserve to signal a more measured approach to future rate increases.
The MAS eased monetary policy twice last year, once in an unscheduled policy review in January 2015.
DARKENING OUTLOOK, MORE EASING?
"The Singapore economy is projected to expand at a more modest pace in 2016 than envisaged in the October policy review," the MAS said in its semiannual policy statement.
"Core Inflation will rise over the course of this year at a milder pace than earlier anticipated," it said.
Joseph Incalcaterra, economist at HSBC in Hong Kong, said the central bank's subdued inflation view opens the door to more policy easing.
"The MAS will remain data dependent," he said.
Official data released on Thursday showed that Singapore's economy failed to post growth in the first quarter from the previous three months - gloomy figures that follow 2.0 percent growth in 2015, the weakest in six years.
Singapore's manufacturing sector has also taken a hit from falls in global oil prices, which have dampened demand for oil rigs built by the city-state's large rig industry.
SINGAPORE DOLLAR TUMBLES
A majority of analysts in a Reuters survey had predicted that the MAS would keep monetary policy unchanged, though some had expected an easing due to weak exports and a depressed manufacturing sector.
The central bank decision was pounced on by Singapore dollar bears, sending it down to 1.3644 on the U.S. dollar - its weakest since March 29 and the biggest fall since August last year.
Analysts expect more downside for the Singapore currency given the weak outlook for growth and a slowdown in China, the city state's biggest export market.
Worryingly, domestic borrowing costs climbed after Thursday's policy move, with the 1-year swap rate rising 8 basis points to 1.42 percent.
A softer Singapore dollar can put upward pressure on local interest rates as investors seek higher yields as compensation for holding the weakening currency.
"The big picture is that we expect Singapore's economy to grow at a fairly sluggish rate of just 2 percent this year and next," said Daniel Martin, senior economist at Capital Economics.
"In the short-term growth will be held back by rising local interest rates, which track the Fed funds rate closely."
($1 = 1.3615 Singapore dollars)
(Additional reporting by Aradhana Aravindan, Manesha Pereira and Ian Chua in Sydney; Editing by Shri Navaratnam)
