Central bank keeps policy for modest Sing$ appreciation

Currency experts not surprised by MAS decision to stick to status quo


HEALTHY prospects for the Singapore economy have prompted the Government to give a nod to further strengthening of the local currency.

The Monetary Authority of Singapore (MAS) said yesterday that it will keep its policy for a modest and gradual appreciation of the Singapore dollar against a trade-weighted basket of currencies.

This, despite a number of external economic risks that have emerged recently.

The twice-yearly review upholds a stance adopted in April 2004 and comes as the economy clocked in surprisingly robust growth for the first quarter of the year.

The decision to stay with the status quo was much expected by currency experts, who were unfazed by a weaker Singdollar, which slipped yesterday by as much as 0.6 per cent against the greenback.

Attributing the blip to a possible intervention by the MAS, they reckon the local currency, which was trading at $1.5213 to the US dollar at 5.50pm yesterday, will strengthen to hit $1.48 by year's end.

The MAS is not tweaking its three-year-old monetary policy stance, leaving intact the centre, slope and width of the policy band, within which the Singdollar is allowed to trade.

It said the stance has served the economy well in the past few years, contributing to a low and stable inflation environment amid robust economic growth.

A stronger Singdollar helps stave off increases in prices of imported goods. But it can be a drag on economic growth by making local exports more expensive.

Looking ahead, the MAS expects the world economy to support sustained growth in the local economy.

'Financial conditions are mostly favourable with inflation well-contained,' said the MAS statement.

'Growth in Asia is expected to be anchored by the major economies of China, India and Japan.'

Official estimates for first-quarter economic growth came in at 6 per cent, beating market expectations.

The services sector proved surprisingly resilient, offsetting a lacklustre showing by the manufacturing sector.

UBS currency strategist Nizam Idris said the economy is set to expand above its long-term potential for a fourth consecutive year. This will bring inflationary pressures that can be curbed by a stronger Singdollar.

Still, the MAS tempered the rosy outlook, citing risks such as the correction of the US housing sector and a persistent weakness of the information technology (IT) industry.

'Singapore's export growth has moderated and the manufacturing sector is expected to expand at a slower rate this year,' said the MAS.

'Conditions in the IT industry are likely to remain sluggish till later in the year.'

A rising Singdollar will come in handy when the goods and services tax (GST) rate is raised in July.

The MAS estimates that the 2 percentage point hike will raise inflation by a 0.5 percentage point this year and the next. But some of this will be tempered by offsetting measures, it said, as it stuck to its inflation projection of between 0.5 per cent and 1.5 per cent.

This appears to be overly optimistic, said experts at United Overseas Bank and UBS. They reckon inflation will exceed 1.5 per cent this year.

'The GST hike will raise inflation this year by 1 percentage point,' said Mr Idris.

Experts shrugged off yesterday's weakness, saying the MAS was reacting to the currency hitting the upper limits of its policy band.

Indeed, the authority said the Singdollar has fluctuated near the upper end of the band in the past six months.

Experts expect the Singdollar to resume its upward trajectory after this correction, although JP Morgan's Mr Claudio Piron said it will lag behind its regional counterparts.

The Singapore economy is more exposed to global economy swings, he explained.