Monday, April 14, 2008

Decision To Let Sing$ Strengthen 'Not A Response To Spike In Inflation'

Source : The Straits Times, Apr 14, 2008

Policy change not a knee-jerk reaction, but aimed at medium term, says Tharman

THE decision to let the Singapore dollar rise further was not a knee-jerk response to a recent spike in inflation, but a decision with longer-term considerations in mind, said Finance Minister Tharman Shanmugaratnam yesterday.

'Short term, we're not in a crisis and if we do face a very severe downturn in growth, you can't rely on monetary policy to solve that; you've got to have other policy responses,' he told reporters yesterday on the sidelines of a community event.

The Monetary Authority of Singapore (MAS) caught many by surprise last Thursday when it said it would allow for an immediate one-off jump in the Sing dollar's value in response to a backdrop of 'continuing cost pressures'.

Singapore manages the value of the local currency as its chief weapon against inflation. A stronger Sing dollar helps make imports, such as oil and food, cheaper. But it also makes local exports less competitive in the global marketplace.

The policy change, which was widely regarded as an aggressive move, caught most analysts by surprise.

Many expected that economic growth concerns would deter the central bank from tweaking its monetary policy so soon after it had moved to allow for a faster Sing dollar appreciation at the last scheduled review in October.

Some analysts said the move suggested that the Government may have underestimated the inflation threat and is playing catch-up.

However, Mr Tharman said yesterday that the central bank looked at price trends over the next one to three years when it decided on the policy change.

'It's got to keep its focus on the medium term. That's the way the MAS does its job.'

As such, Mr Tharman said he expected little impact on inflation in the short term. MAS has projected Singapore's inflation rate this year to come in at the upper half of the 4.5-5.5 per cent forecast range.

Mr Tharman said that the MAS' last two policy changes were not large jumps, but discreet moves that allow a gradual appreciation of the Sing dollar.

They came as the MAS assessed that in the next few years, inflation will be a risk around the world.

'And if it's a risk all round the world, we have to be on guard as well,' said Mr Tharman.

Still, he acknowledged that there are short-term risks, which the Government is watching carefully.

'The exchange rate remains supportive of sustainable growth in the medium term, so it's always a fine balance between paying heed to inflation and paying heed to wanting to ensure that the economy keeps growing.'

The Government last week released a better-than-expected advance estimate of 7.2 per cent gross domestic product growth in the first quarter of the year.

At this point, he said, if Singapore did not focus enough on inflation over the next one to three years, growth would ultimately be undermined.

Asked if a stronger Sing dollar would hurt export competitiveness, he said there will be some compromise in the short to medium term, but it would be mitigated by the economy's performance in the short term, which he said was at its potential.

'It does not make a significant dent on competitiveness over the medium to longer term,' added Mr Tharman. The exchange rate is now about S$1.36 to the US dollar.

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