Singapore Says `High Levels' of Economic Activity May Spur Price Pressure
Singapore, which had a record first- half expansion, said economic activity will probably remain at “high levels” for the rest of the year, adding pressure on business costs and spurring inflation.
Growth is supported by a broad range of industries that will remain “largely intact” in 2010, the Monetary Authority of Singapore said in its annual report today. The central bank said it will issue as much as S$20 billion ($15 billion) in bills starting next year as a new instrument in money-market operations to help lenders manage liquidity.
Singapore’s economy is in contention to be the world’s fastest-expanding in 2010 as rising demand for goods and services prompted the government to raise growth forecasts three times this year and led the central bank to allow currency gains. The outlook is clouded by European governments’ austerity programs to cut budget deficits and cooling household spending in some of the world’s largest economies.
“For Singapore, the underlying support for growth for the rest of 2010 is expected to remain largely intact and economic activity is likely to be sustained at high levels,” the central bank said in the report. “However, if the crisis in Europe worsens, financial contagion spreads and the functioning of the international credit markets becomes impaired, downside risks to global growth could intensify.”
Policy Stance
Singapore’s central bank, also known as the MAS, has for three decades used the currency rather than a benchmark interest rate as its main tool for managing inflation. At its April monetary policy review, the central bank said it would shift the Singapore dollar to a stronger range to trade in and allow a gradual appreciation.
While inflation is forecast to pick up toward the latter part of the year, “at this stage, we assess that the current monetary policy stance of a modest and gradual appreciation” of the currency band remains appropriate, Managing Director Heng Swee Keat said. The central bank predicts inflation will probably average between 2.5 percent and 3.5 percent this year.
Singapore’s inflation is likely to accelerate and policy makers should stay vigilant on the outlook for growth and prices, which may require the “further calibration” of monetary policy, the International Monetary Fund said July 23. In its annual assessment of the country’s economy, the IMF said the Singapore dollar appears “somewhat weaker” than its medium-term equilibrium level.
The currency rose as much as 1.2 percent versus its U.S. counterpart on April 14, the day of the last monetary policy review. It was little changed at S$1.3656 as of 2:28 p.m. in Singapore today.
Capital Flows
The central bank has sufficient flexibility to cope with capital flows, and the Singapore dollar is trading “comfortably” within the policy band, deputy managing director Ong Chong Tee told reporters today.
“Given the strong economic performance of Singapore and the Asian region, we expect international capital to enter Asia in search of investment opportunities,” Standard Chartered Plc analysts Edward Lee and Tai Hui wrote in a report today. The new central bank bills “will provide another tool for money-market operations and help the central bank manage liquidity conditions more effectively,” they said.
Singapore’s consumer prices rose for a sixth month in June as an increase in car and electricity prices pushed transportation and housing costs higher.
Price Pressure
“With the economy set to remain at relatively high levels of activity, rising business costs could put upward pressure on the prices of a wide range of goods and services,” the central bank said.
The government expects the Southeast Asian island’s economy to expand 13 percent to 15 percent in 2010. Growth accelerated to 18.1 percent in the first half, the fastest pace since records began in 1975.
“The strong pace of growth seen in the first half of this year is not expected to be sustained,” Heng told reporters in Singapore today. “Growth is likely to have peaked at the middle of this year, and will moderate to a more sustainable rate, as external demand slows after the post-crisis bounce from stimulus measures and inventory effects wane worldwide.”
The MAS bills next year will be the central bank’s fourth instrument for its money-market operations, Heng said. The central bank will commence issuing the short-term MAS bills to lenders in the second quarter of 2011, with tenors of up to three months, to boost the “availability of liquid securities to banks,” he said.
Currently, Singapore uses foreign-exchange swaps, borrowings and repos in its money-market operations. The so- called MAS bills will be negotiable, so banks needing liquidity can sell them or pledge them as collateral in interbank repo markets as well as the MAS Standing Facility, Heng said.
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
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