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Singapore Sticks to Monetary Policy Despite GDP Contraction

Tom Bonaventure | The Image Bank | Getty Images

Singapore on Friday stuck to its tight monetary policy stance as expected even as GDP unexpectedly contracted in the first quarter, but lowered its inflation forecast for 2013, sending the Singapore dollar lower.

"MAS will maintain its policy of a modest and gradual appreciation of the Singapore dollar nominal effective exchange rate policy band," the Monetary Authority of Singapore (MAS) said in its half yearly monetary policy statement.

"There will be no change to the slope and width of the policy band, as well as the level at which it is centered," MAS added, saying its stance was appropriate for containing inflationary pressures.

Singapore's decision to stick to its tight monetary policy came despite advance estimates released on Friday that showed the economy contracted by 1.4 percent in the first quarter from the fourth quarter on a seasonally adjusted and annualized basis. The median estimate of economists polled by Reuters was for quarter-on-quarter growth of 0.7 percent.

(Read More: Singapore Investors Fearless Despite Easing Prices)

The central bank, however, said it expects Singapore's manufacturing sector and export-oriented services industries to improve gradually over the course of the year, and reiterated its outlook of 1-3 percent growth for the full year.

"Q1 growth came in below consensus so, by sticking to the 1-3 percent growth forecast for 2013, it reflects authorities' confidence the economy will improve," CIMB regional economist Song Seng Wun said.

The central bank lowered its inflation forecast for 2013 to 3-4 percent from the previous range of 3.5 to 4.5 percent and cut its outlook for core inflation to 1.5 to 2.5 percent, citing the weaker-than-expected price increases over the past few months.

The Singapore dollar, the world's 12th most actively traded currency, fell against its U.S. counterpart, reacting to the central bank's more benign outlook on inflation.

(Read More: After Dire Data, Singapore Risks Another Contraction)

"MAS feels a bit more confident about the inflation profile this year because of the policy moves on property and car prices. The previous forecasts were done before the policy moves," said CIMB's Song.

Singapore has been grappling with high inflation over the past two years amid a surge in rents and car prices, even as growth has slowed due to weak demand for its electronic exports.

MAS said in its policy statement it expects imputed rentals on owner-occupied accommodation to increase at a slower pace as a large number of private housing units is set to complete soon.

(Read More: Singapore February Industrial Output Drops More Than Expected)

The cost of COEs for cars has corrected from the high in early 2013 following the tightening of financing restrictions on motor vehicle loans, it added, referring to the certificates of entitlement required by Singapore motorists wishing to buy a new car.

Credit Suisse economist Michael Wan said the Singapore dollar's fall was partly due to the fact that it had been near the top of its trading band. The Bank of Japan's aggressive monetary expansion campaign, which has sent the yen plunging against other major currencies, will also put a floor on the Singapore dollar as the yen formed part of the currency basket.

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

Fifteen of 16 forecasters polled by Reuters ahead of the policy statement had expected MAS to stand pat on policy.