MAS action on S$ prompted by inflation worries
Conrad Tan
Thu, Oct 28, 2010
The Business Times

(SINGAPORE) It was inflation worries that prompted the Monetary Authority of Singapore (MAS) to act earlier this month to strengthen the Singapore dollar, the central bank said yesterday.

More than 80 per cent of the basket of goods and services tracked by the consumer price index rose in price in the third quarter from the second quarter - a proportion that was reached only once before in the past decade, in late 2007, MAS said.

MAS tightened monetary policy on Oct 14 'to dampen external inflation - particularly from global food commodity prices - as well as to provide the necessary macroeconomic restraint on domestic economic activity, thereby ensuring that cost and price pressures do not become entrenched', it said in its twice-yearly Macroeconomic Review yesterday.

Before the Oct 14 statement, the Sing dollar had already risen by some 3 per cent against the currencies of Singapore's main trading partners on a trade-weighted basis since the previous monetary policy statement in April, MAS data published separately yesterday show.

But MAS was worried that the increase wasn't enough to contain inflation pressures that had built up from the breakneck economic expansion earlier this year, as well as from higher food prices.

On Oct 14, MAS widened and steepened the trading band for the Sing dollar slightly, signalling that it would allow faster gains in the currency to fight inflation. Since then, the Sing dollar has strengthened by another 0.3 per cent on a trade-weighted basis, by Goldman Sachs' estimates. MAS publishes weekly data for the trade-weighted exchange rate only up to the date before the most recent monetary policy statement.

Inflation is likely to reach an annual pace of 4 per cent by the end of this year, before slowing to around 2 per cent in the second half of next year, MAS said yesterday. It wants to cap inflation at an average of 2-3 per cent next year.

Data released on Tuesday showed that consumer prices rose 3.7 per cent in the year to September, the fastest pace of inflation since January last year. Compared to the previous month, consumer prices rose 0.2 per cent in September, after adjusting for seasonal variations - the third straight month of increases.

Much of the recent increase in prices has been driven by transport, housing and food, which together make up 63 per cent of the consumer price index used to track price changes.

A stronger Sing dollar helps to curb inflation directly by making imports such as foodstuffs cheaper.

It also works indirectly - and more slowly - to ease domestic inflation pressures by making Singapore's exports less competitive in the short term, reducing demand for workers and thus slowing the increase in wages and other business costs here.

Economic growth is already slowing, which should help to keep inflation in check. Manufacturing output rose 5.1 per cent in September compared to August, after adjusting for seasonal variations. But excluding the volatile biomedical sector, manufacturing output fell 2.1 per cent.

Overall economic activity here peaked in May - after rising for seven straight months since November 2009 - and has since declined slightly, according to a new monthly index constructed by MAS. Full-year growth is still expected to meet the official forecast of 13-15 per cent for 2010, it said.

MAS expects the Singapore economy to continue expanding next year, 'but at a more sustainable rate in line with its growth potential'. Government officials, including Prime Minister Lee Hsien Loong, have previously estimated Singapore's potential output growth at about 3-5 per cent a year.

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