MAS moves to stem inflation as economy grows 9.4% in Q3
Amid fears of rising inflation on the back of a booming economy and a robust economic outlook, the Monetary Authority of Singapore (MAS) tightened its monetary policy yesterday in a surprise move that marked the first shift in its stance in three-and-half years.
The move suggests that the MAS, which targets the exchange rate rather than interest rates to control inflation, will allow the Singapore dollar to appreciate faster.
A stronger Singapore dollar makes imported goods and raw materials cheaper, helping to control the rise in consumer prices.
News of the move came as the Ministry of Trade and Industry (MTI) released advance estimates that the Singapore economy grew 9.4 per cent in the third quarter compared to the corresponding quarter a year earlier, and up from the 8.7-per-cent growth registered in the second quarter.
The robust expansion was underpinned by strong growth in the biomedical, manufacturing and transport engineering clusters.
MTI added that the economy, which has performed better than expected so far this year, "is well on track" to meet full-year forecasts, while MAS expects the economy to grow "at the upper end of the 7-to-8-per-cent forecast range this year". Next year, the economy is expected to expand "within its potential of 4 to 6 per cent".
The positive data helped push the Straits Times Index to a fresh intra-day high of 3,906 but profit-taking ate into the gains and it closed at 3,814.45. The Singapore dollar, meanwhile, shot to a 10-year high against the US dollar at $1.4631 yesterday.
Singapore is the first economy in the region to report third-quarter growth figures. Economists have been anxious for insights into how the US sub-prime-mortgage crisis and subsequent rout in global markets affected Asia's expansion during the three-month period.
Economists were all praise for the robust growth figures, but with inflation at a 12-year high, home prices at their highest in a decade and office rentals at record levels several voiced concern that the economy is showing signs of overheating. This even though Prime Minister Lee Hsien Loong said on Tuesday: "I don't think the economy as a whole is overheating.. inflation is well under control."
Going forward, the MAS said "the economy is expected to moderate to a more sustainable pace" but it added "inflationary pressures stemming from external sources, as well as domestic conditions including a tight labour market and rising rental costs, will persist."
It noted that inflation, measured by the consumer price index (CPI), was within expectations at 0.8 per cent in the first six months, compared to 1 per cent last year.
But against the backdrop of buoyant domestic economic conditions and a rise in global food and energy prices the CPI is expected to rise to between 1.5 and 2 per cent this year. And for the first half of next year, the CPI is expected to rise to about 3.5 per cent, before easing to between 2 and 3 per cent for 2008 as a whole.
Regional economist Song Seng Wun at CIMB-GK Securities, however, said in a radio interview that while some sectors, especially property, were "warming up very nicely", he added: "I don't think (the) economy at this point is showing signs of overheating."
Dr Chua Hak Bin, Citigroup's director of Asia Pacific Economics and Market Analysis, however had a slightly different view of things.
He said: "Expect a policy of seeking a stronger currency to curb inflation. The previous gradual appreciation path was too slow. Even with the recent tightening, it may not be fast enough because inflation risks will be quite high".
He reckoned that "the MAS may increase its appreciation bias even more" with "inflation possibly reaching an historical high", coupled with a "severe risk of overheating".
"High rapid immigration flows, surging property prices — the supply side simply can't take it. People are coming in and there aren't enough hotel rooms. Workers are coming in and there aren't enough places for them to stay. I expect more moderate growth rates next year," Dr Chua said.
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