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Singapore tightens monetary policy on solid growth

14 april 2011, 12:20
Singapore tightened its monetary policy on Thursday, becoming the latest Asian economy to adopt strong measures to curb inflation this year after first-quarter annual growth of 8.5 percent, AFP reports.

The Monetary Authority of Singapore (MAS), the central bank, said in a statement it would "re-centre the exchange rate policy band upwards" with economic growth expected to stay solid in the coming months.

"This policy will ensure price stability in the medium term while keeping growth on a sustainable path," the MAS said in its twice-yearly policy statement released in April and October.

Economists said the upward re-centering of the policy band known as the Nominal Effective Exchange Rate essentially meant an appreciation in the Singapore dollar.

The US dollar hit a record low of Sg$1.2453 immediately after the early-morning announcement but recovered above Sg$1.2510 around 0200 GMT.

Instead of interest rates, Singapore conducts monetary policy via the local dollar which is traded against a basket of currencies of its major trading partners within an undisclosed band.

A stronger local currency will mitigate the cost of imports as Singapore, a city-state, buys virtually all of its food and other needs from abroad.

"It's a tightening of monetary policy with a one-off appreciation (of the Singapore dollar)," said Song Seng Wun, a regional economist with CIMB Research in Singapore.

"It reflects the surprisingly strong growth of the economy."

It was the third straight move by the MAS to tighten monetary policy since April last year.

"Importantly, the big picture is still on inflation as what we've emphasised time and again in the past," economists from Singapore's DBS Bank said in a commentary.

"Indeed, policy has to be pre-emptive and constantly ahead of the curve to be effective."

DBS Bank said it expects Singapore's 2011 inflation to exceed the 3.0-4.0 percent range projected by the MAS because of higher food and energy prices in the coming months.

China, India, Vietnam and the Philippines have recently raised interest rates as energy and food prices soared.

The International Monetary Fund on Monday warned a number of Asian economies were showing signs of overheating and that soaring food and energy prices were threatening to stoke higher inflation.

It said in its latest global economic forecasts that "many emerging market economies will need to tighten policies to lower the risk of a hard landing".

Singapore's trade ministry meanwhile released advance estimates on Thursday showing that gross domestic product (GDP) grew an annual 8.5 percent in the first quarter.

The growth rate was better than the average 5.7 percent expansion projected by 13 economists in a Dow Jones Newswires poll.

The ministry said first-quarter growth was driven by the key manufacturing sector's 13.9 percent surge as demand for electronics and precision engineering improved.

"The Singapore economy continued to grow at a healthy pace in the first quarter of 2011," the ministry said in a statement. "Growth was led by the manufacturing sector."

On a seasonally adjusted quarter-on-quarter annualised basis, the economy expanded 23.5 percent, the ministry said.

Singapore's economy, valued at Sg$285 billion ($227 billion) last year, expanded a record 14.5 percent in 2010.

For this year, the government is projecting 4.0-6.0 percent GDP growth.

By Bernice Han

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