Singapore lets currency rise to tame inflation

April 13, 2012, Friday/ 12:17:00

Singapore's central bank tightened its monetary policy Friday by allowing for a stronger currency to combat the island's stubbornly high inflation rate.

A jump in global oil prices since October has quickened inflation to near 5 percent in Singapore, which imports all of its fuel. A stronger Singapore dollar would lower the prices of imports while possibly making the country's exports less competitive. Unlike most central banks, The Monetary Authority of Singapore uses currency, rather than a benchmark lending rate, to help control money supply. The bank's statement Friday indicated it would allow the Singapore dollar to rise at a faster rate.

The shift in policy will likely speed the rate of appreciation by one percentage point to between 2 percent and 3 percent a year, said Robert Prior-Wandesforde, director of Asian economics at Credit Suisse in Singapore. Besides Singapore and Indonesia, policymakers in Asia will likely hold steady or ease monetary policy amid concern about slowing economic growth, Prior-Wandesforde said. "We doubt Singapore's monetary tightening move will be replicated in Asia this year," he said. "The crucial difference is the fact that Singapore inflation is comparatively high."

The central bank also raised its inflation forecast for this year by one percentage point to between 3.5 percent and 4.5 percent. "Inflation has come in stronger than expected since October and will remain elevated over the next few months," the central bank said in its biannual monetary policy statement. "External inflationary pressures are likely to be sustained, largely due to higher oil prices." The central bank sets a trading range for the Singapore dollar though doesn't publicly disclose the details. It intervenes to keep the currency inside the trading band.

The government also released first quarter preliminary growth figures Friday based on data mostly from January and February. The city-state's economic growth slowed to 1.6 percent in the first quarter from a year earlier, the trade and industry ministry said. The government is forecasting growth of 1 percent to 3 percent this year, down from 4.9 percent last year.

However, compared with the fourth quarter, the economy expanded a seasonally adjusted, annualized 9.9 percent and avoided a recession after falling 2.5 percent in the October to December period.

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