SINGAPORE: Singapore's central bank is expected to ease monetary policy next week by slowing the local dollar's pace of appreciation, according to a Reuters poll, amid signs the economy likely slipped into a recession in the third quarter.
The Singapore dollar, the world's 12th most actively traded currency, has gained around 5.6 percent so far this year, helped by rising foreign investment in Singapore assets that are seen as a safe haven amid the turmoil in global financial markets.
The currency's strength has, however, increased pressure on manufacturers already reeling from weak global orders, and most forecasters predict the Singapore economy shrank in the third quarter following a 0.7 percent seasonally adjusted and annualised contraction in April-June.
Meanwhile, inflation remains high by historical standards, even though the pace of price increase slowed to a nearly two-year low in August, forcing the Monetary Authority of Singapore (MAS) to find a balance between stimulating the economy and keeping cost pressures in check.
"We expect the MAS to maintain a preference for a strong Singapore dollar at the October policy meeting, but at a slower appreciation pace than what the current policy setting allows for, as the economy is likely to slip into a technical recession," Macquarie said in a note to clients.
Macquarie is one of the 14 financial institutions polled by Reuters that expect MAS to ease policy slightly.
Three others, HSBC, ING and Royal Bank of Scotland, predicted the central bank will stand pat given the still strong inflationary pressures.
"The economy remains at the risk of persistent high inflation fuelled by imported l ow short-term interest rates from the US. Inflation has been on the high side among Asian countries and we expect that MAS will look through the activity slowdown and maintain the current policy," said ING economist Prakash Sakpal.
Singapore manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.
At its April policy announcement, MAS reiterated its bias for a "modest and gradual appreciation" of the Singapore dollar and increased the slope of the policy band slightly, indicating it will let the currency appreciate at a faster pace to help lower inflation expectations.
The central bank also narrowed the policy band, indicating it will allow less fluctuations in the local currency.
MAS had, in previous recessions, let the Singapore dollar fall in value by re-centering the exchange rate policy band downwards -- the equivalent of a one-off depreciation -- and adopting a zero percent appreciation path.
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