MAS maintains Singdollar policy, letting it appreciate

MAS maintains Singdollar policy, letting it appreciate

SINGAPORE - The Singapore dollar will be allowed to keep strengthening at the same pace over the next six months in the light of an expected pick-up in both economic growth and core inflation later this year.

The Monetary Authority of Singapore (MAS) said on Friday it made no change to its current policy of a "modest and gradual appreciation" of the Singdollar at its most recent policy review.

Immediately after the announcement, the Singdollar fell 0.2 per cent against the US dollar before regaining some ground later in the day.

The MAS reviews monetary policy twice a year and adjusts it via the exchange rate. A stronger currency counters inflation but can stymie growth by dampening exports.

Although both inflation and economic growth came in weaker than expected in the first three months of the year, the MAS believes they will accelerate in the coming months.

So maintaining the current stance is "appropriate" to contain inflation and facilitate the ongoing restructuring of the economy, it said. On the back of lower-than-anticipated price rises in the beginning of the year, the central bank also cut its forecasts for full-year inflation on Friday.

Core inflation, which excludes accommodation and private transport costs, is expected to come in at a lower 1.5 to 2.5 per cent, compared with the earlier forecast of 2 to 3 per cent.

Imported food and energy price rises should be capped, the MAS said.

But it also warned that the tight labour market could push up core inflation in the second half of the year as higher salaries paid by companies translate into higher prices for consumers.

Overall inflation is similarly tipped to come in at between 3 and 4 per cent this year - down from the previously expected 3.5 to 4.5 per cent - as housing costs rise more slowly and car prices fall after the recent loan curbs.

Meanwhile, the MAS predicts that economic growth will get a boost in the coming months after unexpectedly shrinking in the first quarter of the year.

The outlook for the world economy has improved, which is expected to give a fillip to the sluggish manufacturing and export sectors, it said.

Economists had widely expected the MAS to stay put on monetary policy.

"With inflation still high and the growth outlook expected to improve, risks are nicely balanced on both ends, which makes for a stable monetary policy," said DBS economist Irvin Seah.

The MAS may also be waiting to "see how global and domestic economic developments play out" before making any necessary adjustments in the next monetary policy review in October, said OCBC economist Selena Ling.

Credit Suisse economist Michael Wan, however, believes the MAS is still more focused on inflation worries than growth concerns. "The tight labour market remains the key binding constraint for the central bank," he said.

"Any strong pick-up in global growth could result in runaway wage growth and inflation."

While the slope of the Singdollar is kept under wraps, economists estimate that the currency is set to rise about 2 per cent a year against a carefully selected basket of other currencies.

UOB economists expect the Singdollar to fall slightly against the US dollar in the next few months amid global risk aversion due to ongoing uncertainty about the euro zone.

But they believe the trend will reverse in the second half of this year, with the Singdollar ending the year at 1.22 against the greenback.

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