Singapore yesterday announced a surprise move to tighten monetary policy, pushing the local dollar to new highs as the economy headed for between 13 percent and 15 percent expansion this year.
The Monetary Authority of Singapore signaled its anti-inflation stance after government data showed the economy expanded an annual 10.3 percent during the third quarter.
The Ministry of Trade and Industry said this meant Singapore was on track to achieve blistering growth projections this year after last year’s 1.3 percent contraction caused by the global recession.
PHOTO: BLOOMBERG
Growth in the July-to-September quarter was slower than the 19.6 percent expansion in the previous three months, but this was widely expected because of the exceptional expansion in the first half of the year.
The monetary authority said that while GDP growth was slowing to a “more sustainable pace,” domestic cost pressures are rising because of the “high level of resource utilization” and tight labor market in particular.
“Thus, the balance of risks is weighted towards inflation going forward,” the central bank added.
The bank projects underlying inflation, which excludes accommodation cost and private transport, to average 2 percent this year and 2 percent to 3 percent next year.
The last time inflation became a major concern was in 2008 when it hit 6.5 percent, the highest in nearly three decades, before the global slowdown.
Singapore’s monetary policy is conducted via the local dollar, which is traded against a basket of currencies of its major trading partners within an undisclosed band.
The monetary authority said “the slope of the policy band would be increased slightly,” which essentially means authorities will allow the Singapore dollar to continue to appreciate despite already reaching record highs.
The Singapore dollar strengthened past 1.30 to the US dollar after the announcement, hitting a new high of 1.2886.
“We believe it is concerns about inflation that have prompted MAS to increase the slope of the policy band,” said analysts from Barclays Capital, Barclays Bank’s investment banking division.
“We think this change will likely contain imported inflation pressures and help smaller, import-intensive construction companies,” they wrote in a report.
DBS Bank said in a market commentary that the monetary authority “surprised the market yet again” with its policy statement.
“Indeed, the focus is on inflation in the coming months as external inflationary pressure is expected to pick up on higher commodity prices,” the statement added.
DBS said it was maintaining its growth forecast of 15 percent for the city-state this year, adding that the slowdown in the second half was “much in line with the normalization process in Asia.”
The trade and industry ministry said the decline in growth momentum in the third quarter was “an expected correction from the exceptional growth in the first half.”
“Growth in the rest of the year will be underpinned by a number of industry-specific factors,” the ministry added.
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