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

(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 isexpected to ease monetary policy on Friday by slowing the localdollar's pace of appreciation, according to a Reuters poll, amidsigns the economy contracted in the third quarter.

The Singapore dollar

, the world's 12th most-tradedcurrency, has gained around 5.4 percent so far this year, helpedby rising foreign investment in Singapore assets that are seenas a safe haven amid the turmoil in global financial markets.

The currency's strength has, however, increased pressure onmanufacturers already reeling from weak global demand, and mostforecasters predict the Singapore economy shrank sequentially inthe third quarter.

But the city-state may still avoid a technical recession,defined as two consecutive quarters of contraction in grossdomestic product, as Prime Minister Lee Hsien Loong has saidsecond-quarter GDP may be revised upward to show a positivenumber.

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

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

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

Credit Suisse is one of the 17 forecasters polled by Reutersthat expect MAS to ease policy. Four others, HSBC, ING, Nomuraand Royal Bank of Scotland, predicted the central bank willstand pat, given still-strong inflationary pressures.

"The economy remains at the risk of persistent highinflation fuelled by imported low short-term interest rates fromthe U.S. Inflation has been on the high side among Asiancountries and we expect that MAS will look through the activityslowdown and maintain the current policy," said ING economistPrakash Sakpal.

Singapore manages monetary policy by letting its dollar riseor fall against the currencies of its main trading partnerswithin an undisclosed trading band.

At its April policy announcement, MAS reiterated its biasfor a "modest and gradual appreciation" of the Singapore dollarand increased the slope of the policy band slightly, indicatingit will let the currency appreciate at a faster pace to helplower inflation expectations.

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

MAS had, in previous recessions, let the Singapore dollarfall in value by re-centering the exchange rate policy banddownwards -- the equivalent of a one-off depreciation -- andadopting a zero percent appreciation path.


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

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

A deluge of cheap cash pumped by central banks in thedeveloped world and the surge in foreign companies seeking toraise Singapore dollar loans and debt that are subsequentlyswapped into another currency has depressed yields, and traderssaid MAS's intervention in the swap market were the main reasoninterbank SIBOR rates were not further depressed.

The one-year SIBORhas stayed around 0.57percent since April.

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


Singapore's purchasing managers' index (PMI) slipped deeperinto negative territory last month, dropping to 48.7 points fromAugust's 49.1 and staying below the 50 level that separatesexpansion from contraction for the third straight month as newmanufacturing orders shrank.

But unlike in previous recessions, the job market remainstight due to government measures to make it harder for firms tohire cheaper foreign workers, and businesses continue to faceother rising cost pressures such as rent.

Singapore's Association of Small and Medium Enterprises saida recent survey showed four-in-five members are struggling withrising costs and that three quarters expect costs to continuerising in the next three months.

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

Summary of calls*:SummaryANZ ease reduce slope of policy bandwith no change to level orwidth of band; will focus onwhether MAS uses the word"slightly" to determine paceof easingBarclays ease reduce slope of policy band to

2 pct annual appreciation pace

from 3 pct; no change to width

and midpointBank of ease reduce slope of policy bandAmerica from current 2 pct annualisedMerrill Lynch appreciation bias; no changeto width or midpointBank of ease reduce slope of policy band toSingapore 1.5-2 pct from 2.5-3.0 pct; no

change to width or midpoint

Capital ease shift to looser policy stanceEconomicsCIMB ease Reduce slope of policy bandwith no change to width ormidpointCitigroup ease slight or very slight slopereduction to 1.5 to 2.0 pctappreciation from 2.5 pctCredit ease slight reduction in slope fromAgricole current 2.0 to 2.5 pct

appreciation; will probably

maintain width and midpoint of

bandCredit Suisse ease reduce slope of policy band to1-2 pct appreciation from 2-3pctDBS ease reduce slope of policy band to

2 pct appreciation from 3 pct

HSBC stand pat persistent inflation willpersuade the MAS to maintaincurrent slope, width, andcentre of bandING Financial stand pat Singapore inflation still highMarkets relative to other Asian

countries, and there are risks

from imported low short-terminterest rates from the US.

Macquarie ease reduce slope of policy band to

2 pct appreciation from 3 pct;

no change to width andmidpointMaybank ease 70 pct probability MAS will

ease SGD appreciation pace; no

change (20 pct), shift toneutral (10 pct)Nomura stand pat no change in MAS monetarypolicyOversea-Chines ease expects less hawkish monetaryBanking Corp policy stance, probably viaslope flattening, accompaniedby band wideningOSK-DMG ease reduce slope of policy bandRBS stand pat an easier monetary policy tosupport growth may not bewarranted in a tight labourmarketStandard ease reduce slope of policy band toChartered 2 pct per annum from 3.25 pct;no change to bandUnited ease reduce slope of policy band toOverseas 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 Q2GDP 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))