Singapore eases monetary policy, warns of inflation

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

Singapore's surprise currency shift

Singapore's surprise currency shift
October 14, 2010 - 1:59PM

Singapore unexpectedly signaled it will allow faster currency gains to curb inflation even as the economy shrank, with slowing global growth hurting demand for drugs and electronics. The local dollar rose to a record.

The Monetary Authority of Singapore said today it will steepen and widen the currency's trading band while continuing to seek a ``modest and gradual appreciation.'' Gross domestic product shrank at a 19.8 per cent annual rate in the third quarter from the previous three months after climbing a revised 27.3 per cent in April to June, a separate report showed.

``The implication is that Singapore is less worried about growth and more worried about upside risks to inflation,'' said Robert Prior-Wandesforde, head of Southeast Asian economics at Credit Suisse Group AG in Singapore.

The decision follows pressure from the US and Europe on emerging-market nations to let their exchange rates appreciate to help rebalance demand in the global economy. It also comes as China, the country blamed by US Treasury Secretary Timothy F. Geithner this week for prompting other countries to restrain their currencies, starts allowing faster gains in the yuan.

Singapore's dependence on overseas trade, with non-oil exports equivalent to more than half of GDP, makes it vulnerable to swings in global growth.

Currency climbs

The island's currency rose 0.8 per cent to $S1.2932 per US dollar as of 10:37 a.m. local time. It earlier reached $S1.2893, the strongest since 1981 when Bloomberg began compiling the data, and has gained 8.4 per cent this year, making it the third-best performing currency in Asia excluding Japan. Today's climb of as much as 1.06 per cent was the biggest since June 21.

The Australian dollar was buying $S1.285 in recent trading.

Yuan forwards were near a two-year high today. Twelve-month non-deliverable forwards were at 6.4510 per US dollar, reflecting bets the currency will strengthen about 3.3 per cent from the spot rate over the next year, according to data compiled by Bloomberg. The forward contracts have risen 1.5 per cent this month.

The Monetary Authority of Singapore uses the currency rather than a benchmark interest rate as its main tool to manage inflation. All but one of 14 economists in a Bloomberg survey had expected the central bank to forgo a more aggressive strengthening in the Singapore dollar, a decision that may have helped support overseas sales by manufacturers including Hi-P International Ltd.

``Singapore is the most vulnerable Asian country to the slowdown in the global trade cycle,'' Prior-Wandesforde said. ``The widening of the band initially will be seen as hawkish but longer-term may actually be used in a more dovish direction as and when the economy slows quite sharply.''

Property curbs

At its April monetary policy review, Singapore's central bank said it would shift the local dollar to a stronger range to trade in and sought an appreciation thereafter, the first such combined move in its history.

Singapore in August announced measures to cool the property market, including increasing down payments for second mortgages and imposing a stamp duty on property held for less than three years to curb speculation.

``Domestic cost pressures are rising, given the high level of resource utilization in the economy and tight labor market in particular, as well as the diminishing boost from the cyclical uplift in productivity seen earlier this year,'' the central bank said today. ``The balance of risks is weighted towards inflation going forward.''

Korea holds

The steeper slope will allow a faster pace of appreciation while the wider band will address the increased volatility in the market, said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. He said today's policy change was ``effectively a form of monetary tightening and reflects concerns about domestic inflation.''

In contrast, the Bank of Korea left borrowing costs unchanged for a third straight month today as an appreciating won threatens export growth in Asia's fourth-largest economy.

Singapore's inflation accelerated to an 18-month high of 3.3 per cent in August. The central bank forecasts price gains may quicken to about 4 per cent by the end of 2010 and ``stay high'' in the first half of 2011, it said today.

The island's policy move contrasts with Asian nations from Thailand to Japan, which have taken steps in the past month to cool an appreciation in their currencies that is threatening exports. Japan intervened last month to ease gains in the yen and Thailand said this week it will remove a 15 per cent tax exemption for foreigners on income from domestic bonds, joining South Korea and Brazil in seeking to slow inflows as capital floods into emerging and Asian economies.

Singapore's GDP rose a record 18.3 per cent in the first half, the trade ministry said. Prime Minister Lee Hsien Loong has said the economy may ``moderate'' in the coming months, citing risks from Europe and the US

``Singapore is typically a bellwether for the region's export outlook and it is the first to show cracks as global growth slows,'' Alvin Liew, an economist at Standard Chartered Plc in Singapore, said before the report. Threats to Asian growth include ``the fading impact of stimulus packages, stubbornly high unemployment rates and austerity measures that are likely to crimp consumption in the West,'' he said.

Manufacturing cools

Singapore's economy grew 10.3 per cent in the third quarter from a year earlier, compared with a revised 19.6 per cent expansion in the previous three months, the government said. The median forecast in a Bloomberg News survey of 24 economists was for a 10.8 per cent gain. The 19.8 per cent annual rate of contraction last quarter from the previous three months compares with the median forecast for a 15.7 per cent decline among 19 economists surveyed.

Manufacturing, which accounts for about a quarter of Singapore's economy, climbed 12.1 per cent from a year earlier in the three months through September, after surging a revised 46.1 per cent in the second quarter.

The construction industry gained 6.7 per cent, while services grew 10.2 per cent. The city's two casino resorts run by Genting Singapore Plc and Las Vegas Sands Corp. have attracted millions to its gaming centers, while employment growth is boosting spending at malls and restaurants.

The government reiterated its prediction for GDP to rise 13 per cent to 15 per cent in 2010. That pace would put Singapore in the running to be the world's fastest-growing nation in 2010.

Bloomberg News

Singapore devalues currency after GDP plunge

From The TimesApril 15, 2009

Singapore devalues currency after GDP plunge

Leo Lewis

Singapore’s central bank effectively devalued the city state’s currency yesterday as its Government warned that the global economic crisis would bring the worst economic plunge on record.

Singapore’s unprecedented contraction between January and March was described by analysts as “horrendous”. First-quarter GDP shrank by 11.5 per cent compared with a year earlier, far outstripping analysts’ predictions.

But worse was the Government’s dramatic revision of GDP forecasts for the full year, said traders in Singapore dealing rooms. Previous forecasts of a 5 per cent contraction were revised to one of between 6 per cent and 9 per cent. It was the third time forecasts have been adjusted in the past five months.

Economists rushed to recalculate their outlooks for Singapore and what one told The Times were the “diminishing prospects of an early recovery”.

The Trade Ministry said that recent, tentative signs of stability in, for example, the US housing market, did not yet amount to clear signs of a turnaround. The Monetary Authority of Singapore (MAS) — the central bank — said that “considerable downside risks to growth remain”. That was one of the reasons the MAS gave for easing monetary policy for only the second time since 2003.

The Singapore dollar moves within a trade-weighted band, which is set by the MAS. Moving the entire band lower, as the central bank did yesterday, leads to the currency undergoing an instant devaluation.

Singapore’s dollar advanced as much as 1.2 per cent to S$1.4965 against the US dollar, the strongest level in two months, after the MAS recentered the trading band. It said it does not plan to seek either appreciation or depreciation.

http://business.timesonline.co.uk/tol/business/economics/article6094207.ece


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