April 13 (Bloomberg) -- Singapore’s economy rebounded last quarter, prompting the central bank to unexpectedly tighten monetary policy by allowing faster currency gains to contain inflation. The local dollar rose.
Gross domestic product rose an annualized 9.9 percent in the three months through March 31 from the previous quarter, when it dropped 2.5 percent, the Trade Ministry said today. The median of 12 estimates in a Bloomberg survey was for a 6.8 percent gain. The central bank, which uses the exchange rate to manage inflation, said it will increase “slightly” the slope of the currency trading band and raised its inflation forecast.
The island’s stance contrasts with Asian nations from Indonesia to South Korea, which have kept interest rates unchanged in recent weeks as policy makers grapple with rising inflation risks and the economic impact of slowing growth in China. The local dollar is the region’s best performer this year as investors bet the Monetary Authority of Singapore will tolerate a stronger currency to curb price pressures that it said were more persistent than expected.
“Singapore not only has high inflation relative to its own past but it has high inflation relative to most other Asian countries,” said Robert Prior-Wandesforde, a Singapore-based director of Asian economics at Credit Suisse Group AG. “With growth having bounced back rather sharply, it gave them room to tighten slightly.”
The Singapore dollar rose 0.4 percent to S$1.2491 against its U.S. counterpart at 1:05 p.m. local time today. It has gained 3.8 percent this year. The benchmark Straits Times Index added 0.7 percent.
The central bank also said it is restoring a narrower policy band for the currency, while maintaining a “modest and gradual appreciation.” It widened the trading band at its October 2010 policy review.
The narrower band will ensure that the currency’s strength isn’t “overdone,” said Vishnu Varathan, a Singapore-based economist at Mizuho Corporate Bank Ltd.
“The decision to tighten is a clear signal that the central bank thinks that inflation may be more persistent than expected,” said Edward Lee, Singapore-based regional head of rates strategy at Standard Chartered Plc. “At the same time, they are noting that inflation will ease in the second half and growth remains modest, thereby suggesting that they see the new changes as sufficient for now.”
Singapore’s inflation will average 3.5 percent to 4.5 percent in 2012, the central bank said today, compared with a previous forecast range of 2.5 percent to 3.5 percent. It raised the core inflation projection to a range of 2.5 percent to 3 percent from 1.5 percent to 2 percent. Higher oil costs, rising housing rents, more expensive private transportation and unemployment at a 14-year low have sustained price pressures in the city state.
GDP increased 1.6 percent from a year earlier last quarter, after rising 3.6 percent the previous three months. The expansion was more than the median forecast of 1 percent in a Bloomberg survey.
Singapore’s retail sales growth accelerated in February as vehicle purchases surged and consumers spent more at gas stations, the statistics department said in a separate report today. The retail sales index climbed 19 percent from a year earlier after gaining a revised 1.8 percent in January.
The Singapore monetary authority guides the local dollar against a basket of currencies within an undisclosed band. It adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band. The central bank, which releases a policy statement every six months, eased its stance at its last review for the first time since 2009.
It was forecast to maintain the rate of the local dollar’s advance and refrain from altering its trading band, according to 19 of 21 analysts at financial companies surveyed by Bloomberg. Two said there was a chance it would increase the band’s slope.
“We acknowledge that there are upside risks to inflation, but on balance the growth-inflation matrix should not necessarily have triggered such an aggressive MAS move,” said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong. The move to a steeper slope could trigger further bets on the Singapore dollar and potentially derail the current growth momentum, while narrowing the band would reduce the flexibility needed at times of uncertainty, she said.
External inflationary pressures are likely to be sustained on higher oil prices, and the domestic labor market “remains tight”, the central bank said today.
“This policy stance will help anchor inflation expectations, ensure medium-term price stability, and keep growth on a sustainable path,” the central bank said.
The outlook for the global recovery remains cloudy. In the U.S., payrolls missed estimates in March after the best six months of job gains since 2006, and Federal Reserve officials have said more monetary accommodation may be needed to fuel expansion. China’s economy expanded 8.1 percent last quarter, the slowest pace in almost three years, a report showed today.
Investors have demanded higher yields for Spanish and Italian bonds, reviving concern that Europe’s debt crisis isn’t over even after Greece’s second bailout package in February.
Indonesia kept interest rates unchanged yesterday for a second meeting after cutting its benchmark in February, while the Bank of Korea held borrowing costs today for the 10th consecutive time.
“The vast majority of central banks have finished their easing policy,” said Prior-Wandesforde at Credit Suisse. “I don’t think there are wider implications for policy rates across the region” based on Singapore’s decision.
Singapore, located at the southern end of the 600-mile (965-kilometer) Malacca Strait and 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 the financial services and tourism industries to cut its reliance on exports.
Manufacturing fell 2 percent from a year earlier last quarter, after climbing 9.2 percent in the three months ended Dec. 31, the Trade Ministry said today. The services industry grew 2.9 percent, while construction expanded 6.2 percent.
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