Singapore central bank stands pat as economy shrinks

Singapore central bank stands pat as economy shrinks

    By Wong Siew Ying
    POSTED: 12 Apr 2013 8:31 PM
  
The Monetary Authority of Singapore says it is maintaining a modest and gradual appreciation of the Singapore dollar, despite the contraction in Singapore's Gross Domestic Product in the first quarter of this year.

SINGAPORE: Despite the contraction in Singapore's Gross Domestic Product (GDP) in the first quarter of this year, the central bank is leaving its tight monetary policy unchanged.

The Monetary Authority of Singapore (MAS) says it is maintaining a modest and gradual appreciation of the Singapore dollar.

"This policy stance is assessed to be appropriate for containing inflationary pressures, anchoring inflation expectations, and facilitating the restructuring of the economy towards sustainable growth," MAS said in its latest half-yearly review of its monetary policy on Friday.

Many economists had expected the MAS to stand pat on its policy.

In the April review of its monetary policy, the MAS said it would continue to allow the Singdollar to appreciate at a modest and gradual pace.

Economists said that apart from fighting inflation, the tight monetary policy will help facilitate economic restructuring.

Credit Suisse's director for non-Japan Asia economics, Robert Prior-Wandesforde, said: "Clearly they are worried about inflation, in particular the tightness of the labour market and the fear that it will lead to higher wage growth and in turn higher inflation. I suspect also that the central bank is trying to force some structuring adjustments in some of these exporting companies - basically, force them further up the value chain into new and more profitable areas."

Some economists say exporters which are not competitive will continue to find the going rough as Singapore's real exchange rate is likely to remain strong.

United Overseas Bank economist Francis Tan said: "Our projection for the (US) dollar-Singdollar at the end of this year is 1.22. However we see that there are some renewed risks in the eurozone. With that, we think that the dollar-Singdollar may possibly go up to 1.26 by the end of the second quarter this year before going on the downward trend towards 1.22 by the end of the year."

Despite the GDP contraction in the first quarter, MAS said the Singapore economy should grow at a modest pace this year, as external demand recovers.

The central bank also cut its inflation forecast for 2013, reflecting weaker price increases in recent months.

Measures to rein in housing costs and car prices should also help keep inflation in check.

For the full year, MAS projects core inflation, which excludes housing and private transportation costs, to come in at 1.5 to 2.5 percent - down from its earlier estimates of 2 to 3 percent.

The headline inflation (CPI-All Items inflation) has also been lowered from 3.5 to 4.5 percent to 3 to 4 percent.

Now that the MAS has downgraded its inflation forecast for the year, some economists say there may be some room for the central bank to loosen its monetary policy in the next review in October.

But a lot will depend on the labour market conditions as well as economic outlook in the latter part of the year.

- CNA/ir

- wong chee tat :)