Asia Economy

Singapore Tightens Monetary Policy, Economy Grows 6.4%


Singapore's central bank on Wednesday unexpectedly moved to keep inflation in check by tightening its monetary policy and allowing the Singapore dollar to rise, amid signs that it is worried over rising prices.

The Monetary Authority of Singapore said it would slightly increase the slope of its policy band, effectively letting the Singapore dollar appreciate further against the U.S. dollar. The Singapore dollar hit a 10-year high on the news.

The move comes as the $129 billion economy keeps powering ahead, growing at an annualised, seasonally adjusted rate of 6.4% in the third quarter, slightly below market expectations, advance government data showed on Wednesday.

Compared with a year earlier, gross domestic product was 9.4% higher in the third quarter, amid a fast-growing financial sector and a sharp rise in construction activity prompted by a property boom. That figure was broadly in line with expectations of 9.6% growth.

The city-state's central bank conducts monetary policy by steering the Singapore dollar in a band against a trade-weighted basket of currencies rather than setting an interest rate as most central banks do. Both the band and the basket are kept secret.

"We can say it is a tightening of the monetary policy. Inflation pressure is really building up very quickly in the economy. Food prices have gone up a lot. Imported inflation is building up very strongly, which is why there is a need for a stronger currency to keep inflation at bay," said Irvin Seah, an economist at DBS Bank.

The MAS also raised its inflation expectations for this year and next, forecasting that consumer prices will appreciate by 1.5% to 2% in 2007 -- up from its previous forecast of 1% to 2% -- after the annual inflation rate reached a 12-year high of 2.9% in August.

In 2008, inflation could come in at 2% - 3%, up from its previous forecast of 1% - 2%, it said.

All economists polled by Reuters had expected the MAS to maintain its three-and-a-half-year-old moderately tight monetary policy to keep a lid on inflation as asset prices spiral higher amid a booming economy and after a sales tax hike in July.

However, some economists polled last week believe the central bank's policy meeting in April next year could bring a policy change, citing concerns over inflation and the possibility of the economy overheating.

Fion Phua, 36, who runs a brokerage trading in memberships for golf and country clubs in Singapore, said the booming economy has driven up demand, causing membership prices to jump as much as 40% so far this year.

"A lot of people are cash-rich from the stock and property markets, and expensive club memberships are a status symbol for them. And the demand looks like it's not going to stop,' said Phua.

Singapore's gross domestic product expanded at an annualized rate of 14.4% in the second quarter, its fastest growth in two years.

Third-quarter growth was fueled by a 15.5% year-on-year output jump in construction, as Singapore is building its first two casinos for US$7 billion, a new financial center and a subway line. Across the small island thousands of new luxury apartments are under construction.

The city-state, which at around 700 sq kilometers (270 sq miles) is less than half the size of Greater London, is trying to attract tourists with a host of attractions, including gambling, a 165 metro-high (541 feet) Ferris wheels and Formula One races.

Manufacturing rose 12.3% from a year earlier after second-quarter growth of 17.2% and a decline of 6.2% in the first three months of the year.

Services output climbed 8.1%, partly driven by a thriving financial sector.