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Singapore Central Bank Raises Inflation Forecast, Vigilant on Growth Risks

The Monetary Authority of Singapore raised its inflation estimate and pledged to remain vigilant against risks to growth, saying the economy may expand in the lower half of its forecast range.

Consumer prices may climb 4 percent to 5 percent in 2011, higher than a previous estimate of 3 percent to 4 percent, Managing Director Ravi Menon told reporters in the city state today. He reiterated a prediction for the economy to expand 5 percent to 7 percent this year and said the policy stance of allowing the Singapore dollar to appreciate “remains appropriate.” The currency reached a record today.

Singapore’s economy shrank last quarter as manufacturing slumped, adding to signs of slower growth in Asia after the region led the global recovery from the 2009 recession. Europe’s debt woes and rising U.S. joblessness threaten demand for exports from Asia and have wiped about $2 trillion off stocks worldwide since the beginning of May.

“The ongoing sovereign debt crisis in the euro zone periphery poses significant risks -- both to global economic growth and financial stability,” the central bank said in its annual report released today. “Asia is facing rising inflation, caused primarily by higher oil, food and other commodity prices but also tighter labor markets. MAS will remain vigilant against this range of potential vulnerabilities.”

The Singapore dollar has reached unprecedented levels since the central bank said in April it would allow further appreciation to tame price gains, the third monetary tightening in a year. It rose for a fourth day today against its U.S. counterpart, reaching a record S$1.2114.

Rising Currency

“A stronger Singapore dollar has helped, not just by filtering oil and food price increases, but also by providing a restraining effect on the economy,” Menon said today.

The monetary authority uses the exchange rate as its main tool to manage inflation, guiding the local dollar against a basket of currencies within an undisclosed band. Effects of the previous monetary tightening “will continue to filter through the economy over the rest of this year,” it said in the report.

The central bank said costlier accommodation as a result of rising rentals and higher private transportation costs led to a revision in the inflation forecast.

“The central bank has taken great pains to explain” the source of the price increase, said Kit Wei Zheng, a Singapore- based economist at Citigroup Inc. “It suggests that they are not in a hurry to overreact to factors that are not within their control.”

Singapore’s consumer prices rose 4.5 percent in May compared with a 5.5 percent gain in January. Inflation probably accelerated last month, with prices rising 5.1 percent from a year earlier, according to the median estimate in a Bloomberg News survey ahead of a July 25 report.

Labor Market

“The tight labor market will continue to exert upward pressure on costs and prices, while global oil and food prices are likely to remain firm given supply shocks and strong demand as the global economy slowly recovers,” the central bank said.

The city state, home to the world’s second-busiest container port, has remained vulnerable to fluctuations in overseas demand for manufactured goods even as the government boosts financial services and tourism to reduce its reliance on exports. The island located at the southern end of the 600-mile (965-kilometer) Malacca Strait is among the first countries in the region to report second-quarter data.

Singapore’s GDP fell an annualized 7.8 percent in the second quarter from the previous three months, when it climbed 27.2 percent, the trade ministry said July 14. China’s manufacturing may contract for the first time in a year in July, preliminary data for a purchasing managers’ index showed today.

If the pickup from the slowdown last quarter is weaker than currently expected, Singapore’s growth could come in at the lower half of the 2011 forecast, Menon said.

The central bank posted a record loss of S$10.9 billion ($9 billion) in the year through March as the strength of its currency depleted the value of investments, according to its annual report.

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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