MAS Tightens Policy As Inflation Climbs

Source : The Straits Times, Oct 10, 2007











The Monetary Authority of Singapore on Wednesday unexpectedly moved to keep inflation in check by tightening its monetary policy and allowing the Singapore dollar to rise, amid signs that it is worried over rising prices.

The MAS said it would slightly increase the slope of its policy band, effectively letting the Singapore dollar appreciate further against the US dollar.

The Singapore dollar hit a 10-year high on the news. The currency rose as high as US1.4625 in early trade, its strongest level since August 1997.

The move comes as the US$129 billion (S$191 billion) economy keeps powering ahead, growing at an annualised, seasonally adjusted rate of 6.4 per cent in the third quarter, slightly below market expectations, advance government data showed on Wednesday.

Compared with a year earlier, gross domestic product was 9.4 per cent higher in the third quarter, amid a fast-growing financial sector and a sharp rise in construction activity prompted by a property boom. That figure was broadly in line with expectations of 9.6 per cent growth.

The Republic's central bank conducts monetary policy by steering the Singapore dollar in a band against a trade-weighted basket of currencies rather than setting an interest rate as most central banks do. Both the band and the basket are kept secret.

'We can say it is a tightening of the monetary policy. Inflation pressure is really building up very quickly in the economy. Food prices have gone up a lot. Imported inflation is building up very strongly, which is why there is a need for a stronger currency to keep inflation at bay,' said Irvin Seah, an economist at DBS Bank.

Raised inflation expectations
The MAS also raised its inflation expectations for this year and next, forecasting that consumer prices will appreciate by 1.5 to 2 per cent in 2007 - up from its previous forecast of 1 to 2 per cent - after the annual inflation rate reached a 12-year high of 2.9 per cent in August.

In 2008, inflation could come in at 2-3 per cent, up from its previous forecast of 1-2 per cent, it said.

All economists polled by Reuters had expected the MAS to maintain its three-and-a-half-year-old moderately tight monetary policy to keep a lid on inflation as asset prices spiral higher amid a booming economy and after a sales tax hike in July.

However, some economists polled last week believe the central bank's policy meeting in April next year could bring a policy change, citing concerns over inflation and the possibility of the economy overheating.

Fion Phua, 36, who runs a brokerage trading in memberships for golf and country clubs in Singapore, said the booming economy has driven up demand, causing membership prices to jump as much as 40 per cent so far this year.

'A lot of people are cash-rich from the stock and property markets, and expensive club memberships are a status symbol for them. And the demand looks like it's not going to stop,' said Ms Phua. -- REUTERS