Oct. 10 (Bloomberg) -- Singapore's economy grew more than forecast in the third quarter, extending the longest expansion since 1991, as factories increased output and financial services withstood a slump in global credit and equity markets.

Gross domestic product jumped an annualized 6.4 percent after adjusting for inflation, the 14th straight quarter of growth, the trade ministry said in a statement today. Economists were expecting a 5.1 percent gain.

Singapore's expansion has pushed inflation and private home costs to the highest in more than a decade and encouraged companies to hire at an unprecedented pace. The island's currency rose to a 10-year high after the central bank said today it will allow a ``slightly'' faster appreciation to make imports cheaper and cool price gains.

``The economy is exhibiting resilience as strength from manufacturing picks up the slack from other sectors,'' said Vishnu Varathan, an economist at Forecast Singapore. ``Sentiment in the property market is relatively high and services are holding up.''

The currency rose 0.4 percent to S$1.4669 per U.S. dollar as of 1:27 p.m. in Singapore from S$1.4729 yesterday, after earlier setting a 10-year high of S$1.4625. The benchmark Straits Times stock index reached a record, climbing as much as 1.1 percent to 3,906.16.

Singapore is first in the region to report third-quarter figures. Economists are seeking insight into how the U.S. subprime-mortgage crisis and subsequent rout in global markets affected Asia's expansion during the three-month period.

Business-Friendly

From a year earlier, Singapore's $134 billion economy expanded 9.4 percent after gaining a revised 8.7 percent in the previous three months. The annualized pace of expansion eased from 14.4 percent in the second quarter as construction growth cooled from a decade-high.

Singapore, ranked as the world's most business-friendly economy by the World Bank for the past two years, is offering tax cuts and other incentives to lure hedge funds, insurers and banks to use the island as a hub to serve clients across Asia.

The government's success in attracting financial institutions including Macquarie Bank Ltd. to relocate employees to Singapore has boosted demand for space, pushing office rents in the central business district to record levels. Private home prices have also increased every quarter in the past 3 1/2 years.

``I'm starting to be concerned about how costs have shot up dramatically,'' said Thue Isen, who helps manage $1 billion at Bankinvest Group in Singapore. ``Companies may start to choose other cities for their operations if costs continue to increase.''

Overheating Risk

Services climbed 8.1 percent in the third quarter from a year earlier, while the construction industry grew 15.5 percent in the same period, according to today's report.

Economists from Citigroup Inc., HSBC Holdings Plc and Morgan Stanley have warned the economy is at risk of overheating as inflation quickens.

The island's manufacturing industry grew 12.3 percent in the July-September period from a year earlier, accelerating from an 8.3 percent pace in the second quarter, the trade ministry said today.

Drug makers in Singapore such as Merck & Co. are producing more and marine engineering companies have been deluged with new orders for ships and oil rigs. That has offset an easing in electronics output as weaker growth in the U.S. curbed consumer spending in the nation's biggest overseas market.

Rising Inflation

Coupled with costlier fuel prices and an increase in the goods and services tax, the consumer price index surged 2.9 percent in August from a year earlier. The central bank today said inflation will be between 1.5 percent and 2 percent this year before accelerating to as much as 3 percent in 2008.

``Inflation will be more of a concern,'' said Alvin Liew, an economist at Standard Chartered Bank in Singapore. ``The risk is that there might be some overheating.''

The island's expansion will be at the ``upper end'' of the government's 7 percent to 8 percent forecast, before easing to between 4 percent and 6 percent next year, the Monetary Authority of Singapore said.

``While the economy is expected to moderate to a more sustainable pace, inflationary pressures stemming from external sources, as well as domestic conditions including a tight labor market and rising rental costs, will persist,'' it said.

Concern over quickening inflation has led the central bank, which targets the Singapore dollar instead of interest rates to control price gains, to allow the currency to strengthen to the highest since 1997. The currency is up 4.6 percent this year.

Policy Band

The central bank seeks to keep the dollar from rising or falling outside an undisclosed band based on a basket of currencies of the city's biggest trading partners. It said today it will ``increase slightly the slope of the policy band.''

``The slope steepening is quite unprecedented,'' said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. ``It's structurally a more hawkish signal in terms of trying to contain inflationary pressures.''

The figures today are computed from data for July and August. Revised numbers, including nominal gross domestic product, will be released in November.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

Last Updated: October 10, 2007 04:31 EDT