Singapore tightens monetary policy, currency hits record: Update

Singapore tightened monetary policy further on Thursday by sanctioning an immediate rise in the value of its dollar to record highs, becoming just the latest Asian nation to use currency strength to fight commodity-driven inflation.

The Southeast Asian city-state also reported stellar economic growth for the first quarter and said consumer price inflation was expected to come in at the upper half of the 3-4% forecast range.
The Singapore dollar (SGD=D3) — the world’s 12th most actively traded currency — rose to an all-time high of $1.2452 against the U.S. dollar on the news. It was trading around $1.2555 before the central bank released its half-year monetary policy statement.

 

The authority re-centered its exchange rate policy band upwards, though to below the prevailing nominal effective exchange rate. It also left the slope and width of the band unchanged.

 

“They have raised the inflation forecast for this year, so the tweaking of monetary policy is appropriate, given that it looks that the economy may perform better than expected and therefore exert stronger pressure on the inflation front,” said Song Seng Wun, a senior economist at CIMB.

 

The Monetary Authority of Singapore (MAS) conducts policy by managing the value of the local dollar against a basket of other currencies, which it deems as more effective than setting interest rates given the city-state’s high level of imports.

 

The Singapore dollar had gained close to 2% against the dollar so far this year prior to Thursday’s policy statement, hitting a series of record highs as MAS and many other Asian central banks allow their currencies to appreciate to contain imported inflation.

 

In its policy statement, MAS said it will re-centre its exchange rate policy band below the prevailing level of the Singapore dollar nominal effective exchange rate, surprising some economists who had expected a re-centering at the currency’s current level.

 

MAS said its policy adjustment took into account the tighter policy stance adopted in April and October last year, which will continue to have a restraining effect on the economy and prices.

 

“There will be no change to the slope and width of the band,” the Singapore central bank added.

 

Nine of 12 economists polled by Reuters before the meeting  had predicted Singapore would tighten policy in some way at the review.

 

GDP SOARS

Singapore also reported its economy grew 8.5% in the first quarter from a year ago, helped by strong growth in manufacturing. On a seasonally adjusted quarter-on-quarter annualised basis, the economy grew 23.5%, the fastest pace since the second quarter of 2010.

 

Asia’s central banks are grappling with rising inflation even as high oil prices and a shortage of parts from Japanese factories affected by the earthquake and tsunami threaten to slow global economic growth.

 

South Korea’s central bank revised its 2011 inflation forecast upward on Wednesday, a day after keeping interest rates steady, while Indonesia on Tuesday said it was letting the rupiah rise as part of efforts to contain inflationary pressures.

 

Market watchers were divided on whether Singapore will tighten policy further in October but most said other Asian countries will likely have to raise interest rates further in coming months.

 

“MAS and Malaysia’s central bank were early starters when it came to tightening monetary policy in 2010. Most other Asian central banks started later, and they still have got more work to do throughout 2011,” said Endre Pedersen, managing director for Asia fixed income at Manulife Asset Management in Hong Kong.