Friday, Oct 05, 2012
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 per cent 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 per cent 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 per cent appreciation path.
The Singapore dollar was traded around 1.227 per US dollar on Friday. Analysts say it has been at the top end of the policy band for most of the past few months, even hitting the upper end of the band several times.
MAS has been intervening to keep the Singapore dollar within the policy band, traders said, with the aim of not only keeping the currency within prescribed limits but also putting a floor under interbank rates, which are linked to Singapore dollar forwards.
A deluge of cheap cash pumped by central banks in the developed world and the surge in foreign companies seeking to raise Singapore dollar loans and debt that are subsequently swapped into another currency has depressed yields, and traders said MAS's intervention in the swap market were the main reason interbank SIBOR rates were not further depressed.
The one-year SIBOR has stayed around 0.57 per cent since April.
MAS's forward book shows it has long foreign currency positions totalling $109 billion, evidence of its intervention to soak up Singapore dollar liquidity from the spot market.
Singapore's Purchasing Managers' Index (PMI) slipped deeper into negative territory last month, dropping to 48.7 points from August's 49.1 and staying below the 50 level that separates expansion from contraction for the third straight month as new manufacturing orders shrank.
But unlike in previous recessions, the job market remains tight due to government measures to make it harder for firms to hire cheaper foreign workers, and businesses continue to face rising cost pressures from other areas such as rent.
Singapore's Association of Small and Medium Enterprises said a recent survey showed four-in-five members are struggling with rising costs and that three quarters expect costs to continue rising in the next three months.
Francis Tan, an economist with United Overseas Bank, said Singapore's headline inflation will remain above the 10-year average for another two to three quarters and authorities will have to introduce other administrative measures to keep prices in check instead of just relying on "very blunt FX tool".
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