MAS Slightly Tightens Monetary Policy; S$ At 10-Year Highs

Source : Channel NewsAsia, 10 October 2007

The Singapore dollar was trading at 10-year highs against the greenback on Wednesday after the central bank signalled a slight tightening of its policy in the face of rising inflation, dealers said.

Skyscrapers in Singapore's central business district

In afternoon trade, the local unit was at 1.4654 to the US dollar, up from 1.4752 on Tuesday.

The Monetary Authority of Singapore (MAS), the de facto central bank, said inflationary pressures have picked up, with rents and wages increasing amid buoyant domestic economic conditions and rising global oil and food prices.

Inflation rose to an average 2.8 percent in July-August, but the MAS said about half that increase was attributed to a two-percentage-point rise in the goods and services tax.

Full-year inflation is now projected to reach between 1.5 and 2.0 percent, up from the 0.5-1.5 percent expected when the bank issued its last twice-yearly policy review in April, it said.

For next year, headline inflation is seen rising to about 3.5 percent in the first half before easing to between two and three percent for all of 2008, the MAS said.

"Going forward, while the economy is expected to moderate to a more sustainable pace, inflationary pressures stemming from external sources, as well as domestic conditions including a tight labour market and rising rental costs, will persist," the MAS statement said.

Against this backdrop, MAS said it will continue to seek "a modest and gradual appreciation" of the local dollar. But it said there would be a slight tightening of policy.

"This means there is slightly more room for the Singapore dollar to appreciate. This will ease a lot of imported inflation," Credit Suisse currency strategist Charlie Lay said.

Lay said the local currency should appreciate towards the 1.40 level against the US dollar over the next year.

"In our assessment, this policy stance will remain supportive of economic growth while capping inflationary pressures and ensuring price stability over the medium term," the MAS said.

DBS Group Research said the Singapore dollar "has reprised its role as the proxy for Asian currency appreciation." The unit should close the year between 1.4580 and 1.5030, DBS said.

The MAS conducts monetary policy through the local currency rather than by setting interest rates.

The Singapore dollar is traded against a basket of currencies of the city-state's major trading partners within an undisclosed trading band known as the nominal effective exchange rate (NEER).

Details of the trading band are not made public to prevent speculation in the Singapore dollar. - AFP/ch