Singapore's Policy Tightening May Prompt Asia to Step Up Inflation Fight
Singapore Allows More Currency Gains as Growth Accelerates
Munshi Ahmed/Bloomberg
Economic growth this year may be at the upper end of the government’s 4 percent-to-6 percent forecast range, the central bank said.
Economic growth this year may be at the upper end of the government’s 4 percent-to-6 percent forecast range, the central bank said. Photographer: Munshi Ahmed/Bloomberg
Singapore’s third monetary policy tightening in a year may prompt Asian central banks to allow further interest-rate and currency gains to prevent surging prices from hurting their economies.
The island’s dollar, the best-performing Asian currency outside Japan in the past year and the nation’s main tool to manage inflation, will be allowed to rise further, the Monetary Authority of Singapore said yesterday. While South Korea and Indonesia refrained from raising rates this month, policy makers signaled they will take steps to curb price gains if needed.
“MAS remains well ahead of the curve after aggressive moves last year,” said Vishnu Varathan, an economist in Singapore at Capital Economics (Asia) Pte. “The other central banks have to ask themselves how much tightening they want to do and how soon they want to do it. There’s still some feet- dragging and they can’t be seen hesitating too much as it will send the wrong signals to the market.”
Asia’s policy makers are juggling the need to contain inflation fueled by oil prices near a 30-month high while protecting their economies’ export-led expansion. The region can afford to remove fiscal and monetary stimulus at a “stronger and faster” rate as its growth outpaces the rest of the world, according to the World Bank.
The Singapore dollar jumped today to the strongest level since at least 1981 when Bloomberg data began, reaching as high as S$1.2432 a dollar. The central bank re-centered the currency’s policy band upwards and economists including Irvin Seah at DBS Group Holdings Ltd. (DBS) say the move amounts to a one- off revaluation.
Currency Tool
The currency has climbed more than 10 percent over the past year, according to data compiled by Bloomberg. Unlike most central banks that use rates to control inflation, Singapore conducts monetary policy through its exchange rate, adjusting the pace of appreciation or depreciation against an undisclosed band of currencies.
The island’s gross domestic product grew 23.5 percent last quarter from the previous three months, more than twice the pace economists forecast, according to preliminary estimates from the trade ministry yesterday. Earnings at Singapore companies including lender DBS Group and property developer City Developments Ltd. have surged after the economy’s expansion boosted demand for loans and spurred home prices to a record.
Policy makers who remove stimulus too late won’t see a meaningful impact and will fail to address rising inflation expectations, Sri Mulyani Indrawati, a World Bank managing director, said April 8. She cited China, Vietnam and Indonesia as possible examples.
China Inflation
China’s consumer prices climbed 5.4 percent in March from a year earlier, the most since 2008, data from the statistics bureau showed today. The economy grew a faster-than-estimated 9.7 percent last quarter.
Chinese officials are reining in lending to counter inflation after a record expansion of credit in 2009 and 2010, with the central bank boosting interest rates four times since mid-October and raising banks’ reserve requirements. The Asian nation will implement “prudent” monetary policy and ensure stable consumer prices, the State Council said this week.
Indonesia has left borrowing costs unchanged at the past two meetings, while the Philippines raised its key rate for the first time since August 2008 last month. Vietnam’s inflation accelerated to 13.89 percent in March, the fastest in 25 months, even as the central bank raised interest rates.
Behind the Curve
In South Korea, the central bank held its key rate at 3 percent this week even as it raised its inflation forecast for 2011 to 3.9 percent from 3.5 percent previously. Bank of Korea Governor Kim Choong Soo said this week he will take monetary policy action “neither too slowly nor too fast.”
Indonesia still faces the risk of “high” inflationary pressures as food and oil prices rise, Governor Darmin Nasution said this week, adding that the rupiah’s gains will help contain price pressures and its appreciation may continue this year.
South Korea, Indonesia and India are already “behind the curve” along with possibly Thailand and China, said Win Thin, head of emerging-market strategy at Brown Brothers Harriman & Co. in New York. The central banks of Malaysia and the Philippines are at risk of also falling behind if they don’t raise rates at their meetings in May, he said.
“Most in Asia are operating at or near full capacity, and with commodity prices still buoyant, there should be no hesitation to tighten,” Thin said. “All of these central banks should take a lesson from the MAS and tighten without fear of slower growth and a stronger currency.”
Thai Decision
Unrest in Libya and the Middle East helped push oil prices to $113.46 a barrel this week, increasing inflationary pressure around the world.
The Bank of Thailand will raise its benchmark rate by a quarter of a percentage point to 2.75 percent at its April 20 meeting, according to all eight economists surveyed by Bloomberg News. India’s central bank raised rates last month for the eighth time in a year, boosting the repurchase rate by a quarter point to 6.75 percent after raising the inflation forecast twice since late January.
Singapore’s consumer prices gained 5 percent or more in the first two months of 2011. The central bank said yesterday inflation may reach the upper end of its 3 percent-to-4 percent forecast range this year.
Export Competitiveness
While the Singapore monetary authority adjusted the currency band upwards, it also kept it below the prevailing level of the nominal effective exchange rate.
“While growth is still strong and inflation a concern, much tightening has already been delivered in the past, and therefore a full additional dose is not warranted,” Perry Kojodjojo, a currency strategist at HSBC Holdings Plc in Hong Kong, said after the central bank decision yesterday.
The Singapore government has also said too much appreciation would hurt the export competitiveness of the nation, home to the world’s second-busiest container port located at the southern end of the 600-mile (965-kilometer) Malacca Strait. The island has remained vulnerable to fluctuations in overseas demand for manufactured goods even after the government boosted financial services and tourism.
Non-oil shipments may increase 8 percent to 10 percent in 2011, after growing 22.8 percent last year, according to government forecasts.
“This ‘half re-centering’ was a likely a result of a compromise between policy makers who acknowledged the need for further tightening but yet had concerns on the strength of the Singapore dollar and the impact on competitiveness,” Goldman Sachs Group Inc. economists Mark Tan and Jerry Peng said in a note yesterday. “This compromised nature of tightening also suggests the bar to further incremental tightening moves ahead has likely been raised.”
Singapore is next scheduled to review its monetary policy in October.
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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