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UPDATE 2-PREVIEW-Singapore to slow currency rise as economy shrinks

Wednesday, 10 Oct 2012 | 12:50 AM ET

(Updates to reflect PM's comments, tweaks to forecasts)

* WHAT: Singapore monetary policy statement

* WHEN: Friday, Oct 12

* FORECAST: MAS to slow pace of SGD appreciation

By Kevin Lim

SINGAPORE, Oct 10 (Reuters) - Singapore's central bank is expected to ease monetary policy on Friday by slowing the local dollar's pace of appreciation, according to a Reuters poll, amid signs the economy contracted in the third quarter.

The Singapore dollar

, the world's 12th most-traded currency, has gained around 5.4 percent so far this year, helped by rising foreign investment in Singapore assets that are seen as a safe haven amid the turmoil in global financial markets.

The currency's strength has, however, increased pressure on manufacturers already reeling from weak global demand, and most forecasters predict the Singapore economy shrank sequentially in the third quarter.

But the city-state may still avoid a technical recession, defined as two consecutive quarters of contraction in gross domestic product, as Prime Minister Lee Hsien Loong has said second-quarter GDP may be revised upward to show a positive number.

Singapore's economy contracted a seasonally adjusted and annualised 0.7 percent in April-June, surprising the majority of economists who had forecast a slight expansion.

Meanwhile, inflation remains high by historical standards, even though the pace of price increases slowed to a nearly two-year low in August, forcing the Monetary Authority of Singapore (MAS) to find a balance between stimulating the economy and keeping cost pressures in check.

"Given the fact that inflation is still fairly high, and to anchor inflation expectations, we think that the central bank is unlikely to shift to a completely neutral policy," Credit Suisse said in a note to client.

Credit Suisse is one of the 17 forecasters polled by Reuters that expect MAS to ease policy. Four others, HSBC, ING, Nomura and Royal Bank of Scotland, predicted the central bank will stand pat, given still-strong inflationary pressures.

"The economy remains at the risk of persistent high inflation fuelled by imported low short-term interest rates from the U.S. Inflation has been on the high side among Asian countries and we expect that MAS will look through the activity slowdown and maintain the current policy," said ING economist Prakash Sakpal.

Singapore manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.

At its April policy announcement, MAS reiterated its bias for a "modest and gradual appreciation" of the Singapore dollar and increased the slope of the policy band slightly, indicating it will let the currency appreciate at a faster pace to help lower inflation expectations.

The central bank also narrowed the policy band, indicating it will allow less fluctuations in the local currency.

MAS had, in previous recessions, let the Singapore dollar fall in value by re-centering the exchange rate policy band downwards -- the equivalent of a one-off depreciation -- and adopting a zero percent appreciation path.

INTERVENTION

The Singapore dollar was trading at around 1.23 per U.S. dollar early on Wednesday. Analysts believe it has been at the top end of the policy band for most of the past few months, even hitting the upper end of the band several times.

MAS has been intervening to keep the Singapore dollar within the policy band, traders said, with the aim of not only keeping the currency within prescribed limits but also putting a floor under interbank rates, which are linked to Singapore dollar forwards.

A deluge of cheap cash pumped by central banks in the developed world and the surge in foreign companies seeking to raise Singapore dollar loans and debt that are subsequently swapped into another currency has depressed yields, and traders said MAS's intervention in the swap market were the main reason interbank SIBOR rates were not further depressed.

The one-year SIBOR has stayed around 0.57 percent since April.

MAS's forward book shows it has long foreign currency positions totalling $109 billion, evidence of its intervention to soak up Singapore dollar liquidity from the spot market.

OTHER MEASURES

Singapore's purchasing managers' index (PMI) slipped deeper into negative territory last month, dropping to 48.7 points from August's 49.1 and staying below the 50 level that separates expansion from contraction for the third straight month as new manufacturing orders shrank.

But unlike in previous recessions, the job market remains tight due to government measures to make it harder for firms to hire cheaper foreign workers, and businesses continue to face other rising cost pressures such as rent.

Singapore's Association of Small and Medium Enterprises said a recent survey showed four-in-five members are struggling with rising costs and that three quarters expect costs to continue rising in the next three months.

Francis Tan, an economist with United Overseas Bank, said Singapore's headline inflation will remain above the 10-year average for another two to three quarters and authorities will have to introduce more administrative measures to keep prices in check instead of just relying on "very blunt FX tool".

Summary of calls*: Summary ANZ ease reduce slope of policy band with no change to level or width of band; will focus on whether MAS uses the word "slightly" to determine pace of easing Barclays ease reduce slope of policy band to

2 pct annual appreciation pace

from 3 pct; no change to width

and midpoint Bank of ease reduce slope of policy band America from current 2 pct annualised Merrill Lynch appreciation bias; no change to width or midpoint Bank of ease reduce slope of policy band to Singapore 1.5-2 pct from 2.5-3.0 pct; no

change to width or midpoint

Capital ease shift to looser policy stance Economics CIMB ease Reduce slope of policy band with no change to width or midpoint Citigroup ease slight or very slight slope reduction to 1.5 to 2.0 pct appreciation from 2.5 pct Credit ease slight reduction in slope from Agricole current 2.0 to 2.5 pct

appreciation; will probably

maintain width and midpoint of

band Credit Suisse ease reduce slope of policy band to 1-2 pct appreciation from 2-3 pct DBS ease reduce slope of policy band to

2 pct appreciation from 3 pct

HSBC stand pat persistent inflation will persuade the MAS to maintain current slope, width, and centre of band ING Financial stand pat Singapore inflation still high Markets relative to other Asian

countries, and there are risks

from imported low short-term interest rates from the US.

Macquarie ease reduce slope of policy band to

2 pct appreciation from 3 pct;

no change to width and midpoint Maybank ease 70 pct probability MAS will

ease SGD appreciation pace; no

change (20 pct), shift to neutral (10 pct) Nomura stand pat no change in MAS monetary policy Oversea-Chines ease expects less hawkish monetary Banking Corp policy stance, probably via slope flattening, accompanied by band widening OSK-DMG ease reduce slope of policy band RBS stand pat an easier monetary policy to support growth may not be warranted in a tight labour market Standard ease reduce slope of policy band to Chartered 2 pct per annum from 3.25 pct; no change to band United ease reduce slope of policy band to Overseas Bank 2 pct appreciation pace from

2.5 pct; no change to band

Westpac ease reduce SGD pace of

appreciation to 1 pct annually

from 2 pct

* Most estimates were made before PM Lee said on Tuesday that Q2 GDP data would be revised further.

(Additional reporting by Vidya Ranganathan and Cheon Jong Woo; Editing by Sanjeev Miglani and Eric Meijer)

((Kevin.Lim@thomsonreuters.com)(65)(6403 5663))

Keywords: SINGAPORE POLICY/

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