Published: Sunday, 11 Oct 2009 | 11:20 PM ET

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Singapore's central bank kept its loose monetary policy unchanged on Monday because it is unconvinced an economic rebound can be sustained, leaving economists to expect tightening next year.

CNBC.com

The decision came as the economy expanded a forecast-beating 0.8 percent in the third quarter from a year ago, returning to growth after three quarters of contraction, though the central bank said there was no decisive recovery in export demand.

The cautious outlook for the export-dependent country mirrored policymakers' concerns from the United States to South Korea that an economic revival could taper off, underscoring the need for growth-supporting policies.

"Going forward, do we see this kind of growth in Q4? It is quite unlikely," said Wai Ho Leong, economist at Barclays in Singapore. "On the policy front ... the chances are the central bank is building towards April normalisation."

The Monetary Authority of Singapore, which next reviews policy in April, manages the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates.

The currency fell as far as 1.4010 per U.S. dollar, down nearly 0.4 percent from Friday's close and compared to levels of 1.3950 just before the policy announcement. The Singapore dollar had risen last week as some investors had placed bets on a possible tightening of policy.

The central bank said there could be some upward consumer price pressure from higher oil and food prices, though underlying domestic cost pressures will be contained. It forecast inflation of 1 percent to 2 percent next year.

"MAS will continue to be vigilant over developments in the external environment including the medium-term risk of stronger global inflationary pressures," the Monetary Authority of Singapore (MAS) said in a statement.

On The Rebound        

Singapore's economy continued to grow robustly in the third quarter as the base of the recovery extended beyond pharmaceuticals into the wider manufacturing and services industries.

GDP grew 14.9 percent from the previous quarter on a seasonally adjusted basis.

The government lifted its forecast for 2009 GDP to a contraction of between 2.5 to 2 percent, from a forecast of a contraction of 6 to 4 percent.

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"Inflationary pressure is still benign, growth is showing steady improvement. But overall economic fundamentals and external conditions are still below the historical trend, or where MAS would extend a tightening policy," said Irvin Seah, economist at DBS Group in Singapore.

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