Singapore tightens policy as inflation climbs

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Reuters - Wednesday, October 10

The city-state, which at around 700 sq kilometres (270 sq miles) - SINGAPORE, Oct 10 - Singapore's central bank on Wednesday unexpectedly moved to keep inflation in check by tightening its monetary policy and allowing the Singapore dollar to rise, amid signs that it is worried over rising prices.

The Monetary Authority of Singapore said it would slightly increase the slope of its policy band, effectively letting the Singapore dollar appreciate further against the U.S. dollar. The Singapore dollar hit a 10-year high on the news.

The move comes as the $129 billion economy keeps powering ahead, growing at an annualised, seasonally adjusted rate of 6.4 percent in the third quarter, slightly below market expectations, advance government data showed on Wednesday.

Compared with a year earlier, gross domestic product was 9.4 percent higher in the third quarter, amid a fast-growing financial sector and a sharp rise in construction activity prompted by a property boom. That figure was broadly in line with expectations of 9.6 percent growth.

The city-state's central bank conducts monetary policy by steering the Singapore dollar in a band against a trade-weighted basket of currencies rather than setting an interest rate as most central banks do. Both the band and the basket are kept secret.

"We can say it is a tightening of the monetary policy. Inflation pressure is really building up very quickly in the economy. Food prices have gone up a lot. Imported inflation is building up very strongly, which is why there is a need for a stronger currency to keep inflation at bay," said Irvin Seah, an economist at DBS Bank.

The MAS also raised its inflation expectations for this year and next, forecasting that consumer prices will appreciate by 1.5 to 2 percent in 2007 -- up from its previous forecast of 1 to 2 percent -- after the annual inflation rate reached a 12-year high of 2.9 percent in August.

In 2008, inflation could come in at 2-3 percent, up from its previous forecast of 1-2 percent, it said.

All economists polled by Reuters had expected the MAS to maintain its three-and-a-half-year-old moderately tight monetary policy to keep a lid on inflation as asset prices spiral higher amid a booming economy and after a sales tax hike in July.

However, some economists polled last week believe the central bank's policy meeting in April next year could bring a policy change, citing concerns over inflation and the possibility of the economy overheating.

Fion Phua, 36, who runs a brokerage trading in memberships for golf and country clubs in Singapore, said the booming economy has driven up demand, causing membership prices to jump as much as 40 percent so far this year.

"A lot of people are cash-rich from the stock and property markets, and expensive club memberships are a status symbol for them. And the demand looks like it's not going to stop,' said Phua.

Singapore's gross domestic product expanded at an annualised rate of 14.4 percent in the second quarter, its fastest growth in two years.

Third-quarter growth was fuelled by a 15.5 percent year-on-year output jump in construction, as Singapore is building its first two casinos for US$7 billion, a new financial centre and a subway line. Across the small island thousands of new luxury apartments are under construction.

The city-state, which at around 700 sq kilometres (270 sq miles) is less than half the size of Greater London, is trying to attract tourists with a host of attractions, including gambling, a 165 metre-high Ferris wheels and Formula One races.

Manufacturing rose 12.3 percent from a year earlier after second-quarter growth of 17.2 percent and a decline of 6.2 percent in the first three months of the year.

Services output climbed 8.1 percent, partly driven by a thriving financial sector.

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SINGAPORE: The Singapore dollar was trading at 10-year highs against the greenback on Wednesday after the central bank signalled a slight tightening of its policy in the face of rising inflation, dealers said.

At midday, the local unit was at 1.4667 to the US dollar, up from 1.4752 on Tuesday.

The Monetary Authority of Singapore (MAS), the de facto central bank, said inflationary pressures have picked up, with rents and wages increasing amid buoyant domestic economic conditions, and rising global oil and food prices.

Inflation rose to an average 2.8 per cent in July-August, but MAS said about half that increase was attributed to a two-percentage-point rise in the goods and services tax.

Full-year inflation is now projected to reach between 1.5 and 2.0 per cent, up from the 0.5 to 1.5 per cent expected when the bank issued its last twice-yearly policy review in April, it said.

For next year, headline inflation is seen rising to about 3.5 per cent in the first half before easing to between two and three percent for all of 2008, MAS said.

"Going forward, while the economy is expected to moderate to a more sustainable pace, inflationary pressures stemming from external sources, as well as domestic conditions including a tight labour market and rising rental costs, will persist," the MAS statement said.

Against this backdrop, MAS said it will continue to seek "a modest and gradual appreciation" of the local dollar. But it said there would be a slight tightening of policy.

"This means there is slightly more room for the Singapore dollar to appreciate. This will ease a lot of imported inflation," Credit Suisse currency strategist Charlie Lay said.

Lay said the dollar should appreciate towards the 1.40 level against the US dollar over the next year.

"In our assessment, this policy stance will remain supportive of economic growth, while capping inflationary pressures and ensuring price stability over the medium term," MAS said.

The MAS conducts monetary policy through the local currency rather than by setting interest rates.

The Singapore dollar is traded against a basket of currencies of the city-state's major trading partners within an undisclosed trading band known as the nominal effective exchange rate (NEER).

Details of the trading band are not made public to prevent speculation in the Singapore dollar. - AFP/ac