SINGAPORE: Singapore's central bank eased monetary policy slightly on Friday in the face of global economic weakness, stressing that inflation will remain elevated in the near term.
The decision highlighted the policy dilemma facing many Asian central banks as they grapple with both slowing growth and persistent price pressures.
The local currency rose as much as 0.7 percent after the decision to relax policy, which was not as aggressive as market watchers had been expecting given fears that Europe's debt crisis could spawn a global recession.
Unlike most central banks which set interest rates, the Monetary Authority of Singapore (MAS) manages policy by letting the local dollar rise or fall against a secret basket of currencies of its main trading partners to control growth or imported inflation. Its currency is the world's 12th most actively traded.
MAS's decision may also give hints on future policy in China, as the Singapore dollar is often used as a proxy for trading the Chinese yuan .
The MAS said on Friday it would continue to let the Singapore dollar appreciate, but at a more modest pace than earlier in the year, saying the prospects for growth in the country's major trading partners have deteriorated.
Singapore's economy is expected to expand more slowly next year, and growth could be below its potential rate of 3-5 percent, the MAS said in a statement after its twice-yearly policy review.
Despite the gloomy global outlook, Bank of America Merrill Lynch economist Chua Hak Bin said the MAS could not ease policy further as annual inflation is expected to remain high at 5 percent or above in coming months.
"Monetary policy is more constrained because of elevated headline inflation. The right policy mix may be for more aggressive fiscal measures if the downturn worsens (and) Singapore has ample fiscal space to respond," he said.
However, CIMB rates and FX strategist Suresh Kumar Ramanathan said the Singapore central bank could have done more to ease policy, possibly by re-centering the currency band slightly downwards in view of the weakening economy. That would have made exports more competitive.
"They could have done more to move the mid-point at least. I am afraid MAS may be behind the curve on this one," he said.
MAS said in its policy statement that "headline inflation will be elevated for the rest of this year before easing, especially in the second half of 2012".
Singapore slightly tightened policy in April by sanctioning an immediate rise in the value of its dollar, saying headline inflation will likely stay elevated.
Ahead of the October policy review, all 13 economists polled by Reuters had predicted Singapore would loosen policy in some way as global demand cools, although only one expected MAS to switch to a neutral currency bias.
SINGAPORE ECONOMY WEAKENS
Singapore also reported on Friday that its economy grew 1.3 percent in the third quarter on a seasonally adjusted and annualised rate, beating forecasts for an expansion of 0.8 percent.
This meant the city-state narrowly avoided a recession as its economy had contracted a revised 6.3 percent in the second quarter.
However, third quarter growth was due primarily to a surge in biomedical production that more than offset the continued decline in electronics. Output from the biomedical sector can be highly volatile.
On a sequential basis, Singapore's services industries contracted an annualised 0.7 percent as problems in the global economy affected more sectors.
Singapore's decision to loosen policy follows numerous economists' downgrades of global growth forecasts for this year and 2012.
Indonesia's central bank surprised markets earlier this week to cut interest rates by a quarter of a percentage point, the first such move by a G20 member after Brazil. The Philippine government on Monday agreed to accelerate some spending to support slowing activity after cutting forecasts for both economic growth and trade in 2011 and 2012.
Singapore, whose trade is three times its GDP, is the most open economy in Asia alongside Taiwan, and both typically feel the effects of headwinds in the global economy in the same quarter or subsequent quarter, according to Barclays Capital.
Singapore's trade ministry said it now expected GDP growth this year to be around 5 percent, down from its previous forecast of 5-6 percent which had already been revising downward from 5-7 percent.
HOUSING WOES
"MAS will continue with the policy of a modest and gradual appreciation of the Singapore dollar NEER (nominal effective exchange rate) policy band in the period ahead," the central bank said in its half-yearly policy statement.
"However, given the expected moderation in core inflation, the slope of the policy band will be reduced, with no change to the width of the band and the level at which it is centred," MAS added.
MAS said the persistently high headline inflation in Singapore was partly due to housing rental prices, the largest component of accommodation costs in the consumer price index.
But while many Singaporeans own their homes and are not immediately affected by higher rents, property prices are rising and the many foreigners working in the city-state are grappling with rising rents due to a shortage of housing.
Resale prices for government-built apartments that cater to the mass market rose at a faster pace during the third quarter, according to preliminary data, although the pace of increase in private home prices slowed, especially at the high end.
The Singapore dollar was trading around 1.2730 against the US dollar by 0330 GMT, compared with 1.2770 just before the MAS announcement at 0000 GMT and 1.285 earlier in the Asian day.
"MAS slightly surprised with a less bearish stance. The market expected more easing," said Goh Puay Yeong, Asia FX strategist at Credit Suisse in Singapore.
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