Posted on 14 October 2011 - 09:27am
Last updated on 14 October 2011 - 02:29pm
SINGAPORE (Oct 14, 2011): Singapore's central bank loosened monetary policy slightly on Friday in the face of global economic weakness but not as much as markets had expected, stressing inflation was expected to remain elevated in the near term.
The decision to allow the Singapore dollar to appreciate at a more modest pace sent the local currency up as much as 0.7% in early trade, and highlighted a policy dilemma for Asian central banks as they face both slowing growth and persistent price pressures.
"MAS will continue with the policy of a modest and gradual appreciation of the Singapore dollar NEER (nominal effective exchange rate) policy band in the period ahead," the Monetary Authority of Singapore (MAS) said in its half-yearly policy statement.
"However, given the expected moderation in core inflation, the slope of the policy band will be reduced, with no change to the width of the band and the level at which it is centred," MAS added.
The Singapore dollar traded around 1.2745 against the US dollar, up from 1.2770 just before the announcement and 1.285 earlier in the Asian day.
"MAS slightly surprised with a less bearish stance. The market expected more easing," said Goh Puay Yeong, Asia FX strategist at Credit Suisse in Singapore.
Singapore manages monetary policy by letting the local dollar rise or fall against a secret basket of currencies of its main trading partners to boost growth or control imported inflation. Its currency is the world's 12th most actively traded.
Growth trends in the highly open economy and its monetary settings are a bellwether not just for demand from developed markets but may also give hints on policy in China, whose managed float of the yuan is believed to be modelled on the Singapore dollar.
Chua Hak Bin, an economist at Bank of America Merrill Lynch, said the MAS statement suggested headline inflation will remain high at 5 percent or above in coming months.
"That is probably the reason why the MAS is probably a bit more constrained in easing to a neutral bias," he said.
MAS said in its policy statement that "headline inflation will be elevated for the rest of this year before easing, especially in the second half of 2012".
Singapore also reported on Friday that its economy grew 1.3% in the third quarter on a seasonally adjusted and annualised rate, beating forecasts for an expansion of 0.8%.
This meant the city-state narrowly avoided a recession as its economy had contracted a revised 6.3% in the second quarter.
However, third quarter growth was due primarily to a surge in biomedical production that more than offset the continued decline in electronics. On a sequential basis, Singapore's services industries contracted 0.7%.
Output from the biomedical sector can be highly volatile.
Singapore's decision to loosen policy follows numerous economists' downgrades of global growth forecasts for this year and 2012, and Indonesia's surprise decision earlier this week to cut interest rates by a quarter of a percentage point.
All 13 economists polled by Reuters before the policy statement had predicted Singapore would loosen policy in some way as global demand cools, although only one expected MAS to switch to a neutral currency bias.
Singapore slightly tightened policy in April by sanctioning an immediate rise in the value of its dollar, saying headline inflation will likely stay elevated. – Reuters
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