Singapore Moves to Curb Inflation as Growth Rebounds

Singapore's central bank unexpectedly further tightened monetary policy on Thursday, pushing the Singapore dollar to a record high against the U.S. dollar, in a move aimed at keeping a lid on soaring prices.

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Singapore's economy grew at an annualized, seasonally adjusted rate of 16.9 percent in the first quarter, beating economists' expectations, government data showed on Thursday, after a surprise 4.8 percent contraction in the fourth quarter of 2007.

The data beat a median forecast from economists polled by Reuters for growth of 11.5 percent because of a recovery in pharmaceutical and electronics manufacturing.

"The GDP figures were stronger than what the market had predicted and that gave the Monetary Authority confidence to tighten the policy," said Joseph Tan, an economist at Fortis.

"Strength of GDP quarter-on-quarter came from domestic sources. Where we go from here is a step in time approach but the one-up shift of the band, as opposed to the steepening of the Singapore dollar, shows that MAS recognizes inflation is an imminent danger."

The Monetary Authority of Singapore (MAS) conducts policy through the exchange rate, steering the Singapore dollar within a secret trade-weighted band against a basket of currencies, rather than by adjusting interest rates.

Growth Support

"Against (the) backdrop of continuing external and domestic cost pressures, an upward shift of the policy band at this point will help to moderate inflation going forward, while providing support for sustainable growth in the economy," the central bank said in a twice-yearly monetary policy statement.

"MAS will therefore re-center the exchange rate policy band at the prevailing level of the S$NEER. There will be no change to the slope or width of the policy band."

The Singapore dollar hit a record high, up 0.9 percent on the news to 1.3683 per U.S. dollar. The currency has gained around 5 percent this year.

Ten out of the 12 economists polled by Reuters had expected the MAS to refrain from tightening monetary policy due to concerns about slower economic growth.

The other two had expected the MAS to tighten policy to fight inflation, which stood at 6.5 percent in February. In January it hit 6.6 percent, the highest since March 1982.

The MAS said it expected inflation in the upper half of its 4.5 percent to 5.5 percent forecast range this year.

Singapore is one of the first Asian countries to report GDP data each quarter. The health of its exports is seen by analysts as a barometer of demand for Asian goods.

Despite concern about slower global growth, most central banks in Asia have refrained from easing monetary policy due to high inflation.

Some analysts said a stronger Singapore dollar would further cut demand for the island's exports by making them more expensive at a time when demand in the key U.S. market is weakening.

They also said a stronger Singapore dollar may not be as effective as before in reining in inflation because domestic factors such as a tight labor market, high wages and elevated property prices were factors as well.

The MAS tightened policy slightly at its last meeting in October as asset prices spiraled higher.

Singapore's economic growth is largely fuelled by manufacturing of products such as electronics, pharmaceuticals and oil rigs. However, the economy also relies increasingly on tourism, financial services and construction.