Local currency may hit $1.40 against the greenback by end of next year
INFLATION concerns have taken centre stage, after a surprise move by the Monetary Authority of Singapore (MAS) to curb rising pressure on consumer prices.
GOING UP: Consumer prices have been rising strongly, driven by a robust domestic economy, increasing world oil and food prices, and a July hike in the goods and services tax. -- ST FILE PHOTO
Amid rosy economic news on the local economy. the central bank said yesterday it will allow the Singapore dollar to strengthen at a slightly faster pace, as inflation may rise faster than previously predicted.
This is the key tool the MAS uses to combat inflation, which can cause major headaches if it gets out of control.
Economists said the adjustment will help keep business costs competitive by softening price hikes of imported goods and services.
They added that local manufacturers should not lose out much in competitiveness, as Asian currencies are strengthening across the board.
But economists added that other measures may be needed to cool the local property and labour markets.
INFLATION concerns have taken centre stage, after a surprise move by the Monetary Authority of Singapore (MAS) to curb rising pressure on consumer prices.
Amid rosy economic news on the local economy. the central bank said yesterday it will allow the Singapore dollar to strengthen at a slightly faster pace, as inflation may rise faster than previously predicted.
This is the key tool the MAS uses to combat inflation, which can cause major headaches if it gets out of control.
Economists said the adjustment will help keep business costs competitive by softening price hikes of imported goods and services.
They added that local manufacturers should not lose out much in competitiveness, as Asian currencies are strengthening across the board.
But economists added that other measures may be needed to cool the local property and labour markets.
'I thought they would do it next year but clearly, inflation has breached the MAS' comfort zone,' said Citigroup economist Chua Hak Bin.
The MAS statement, which coincided with advance data of the economy's third-quarter performance, sent the local currency to a new 10-year high against the greenback.
As government estimates of growth came in at 9.4 per cent, beating market forecasts, the Singdollar rose 0.5 per cent to $1.4649.
Currency experts, deciphering the MAS' brief comments on its policy tweak, said the local currency may hit $1.40 to the United States dollar by the end of next year.
Consumer prices have been rising strongly, driven by a robust domestic economy, increasing world oil and food prices, and a July hike in the goods and services tax (GST).
'Domestic price pressures are expected to persist due to heightened supply constraints,' said the MAS.
'Externally, oil, food and other commodity prices will remain firm into next year.'
The MAS now expects price levels to rise between 2 per cent and 3 per cent next year, up from a previous prediction that inflation would not exceed 2 per cent. Prices will rise faster in the first half - by 3.5 per cent - and should ease after that.
For this year, the MAS has bumped up its inflation forecast to between 1.5 per cent and 2 per cent, up from between 0.5 per cent and 1.5 per cent.
With this in view, the MAS is increasing the slope of the Singdollar's trading band slightly, while keeping a policy to allow a modest and gradual rise of the trading limits.
The central bank said it is neither re-centring the trading band nor changing its width.
'This policy stance will remain supportive of economic growth, while capping inflationary pressures and ensuring price stability over the medium term,' said the MAS.
UBS currency strategist Nizam Idris noted that the slope change - the first announced by the MAS - was the most tempered adjustment of the three variables.
'It says that they are still uncertain about the short term and, therefore, don't want to have an immediate impact as a re-centring of the policy band would have.
'I think the market and the MAS have been surprised by how easy it's been for retailers to pass on the GST hike to consumers,' said Mr Nizam.
Analysts said further monetary tightening and non-monetary measures may be needed next year.
Citigroup's Dr Chua said non-monetary measures may be needed to cool the labour and property markets.
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RISING PRICES
'Inflationary pressures have picked up amid buoyant domestic economic conditions and the recent rise in global oil and food prices.'
MAS, which will let the Singapore currency strengthen at a slightly faster pace in view of the rising pressure on consumer prices in the Republic
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