April 12 (Bloomberg) -- Singapore stuck to a policy of allowing gradual gains in its currency even after the economy unexpectedly contracted last quarter, as inflationary pressures curbed scope for monetary stimulus.
Gross domestic product shrank an annualized 1.4 percent in the three months through March 31 from the previous quarter, when it rose 3.3 percent, the Trade Ministry said today. The median of 10 estimates in a Bloomberg News survey was for 1.7 percent expansion. The Monetary Authority of Singapore said it won’t change the slope and width of the currency trading band that it uses as the main policy tool.
Prime Minister Lee Hsien Loong’s move to tighten restrictions on foreign workers and encourage companies to boost productivity has led to a labor shortage and persistent price pressures. At the same time, the Southeast Asian nation’s exports posted the biggest drop since 2009 in February, while industrial production slid the most in at least three years.
“The MAS continues to be vigilant toward upward pressure on inflation stemming from a very tight labor market,” said Khoon Goh, a Singapore-based senior strategist at Australia & New Zealand Banking Group Ltd., who correctly predicted the outcome of the half-yearly monetary policy review.
The Singapore dollar fell 0.1 percent to S$1.2378 versus its U.S. counterpart as of 3 p.m. local time. It has weakened 1.3 percent this year, less than the declines in the Japanese yen, South Korean won and Taiwanese dollar. In the past 12 months, the currency has risen 1.3 percent against the greenback, and jumped 25 percent against the yen.
The island uses the exchange rate rather than borrowing costs to conduct monetary policy, adjusting the pace of appreciation or depreciation against an undisclosed trade-weighted band of currencies by changing the slope, width and center of the band. A flatter slope allows slower appreciation or depreciation over time.
“While the economy experienced some consolidation in the first three months of 2013, it should see a gradual improvement for the rest of the year, on the back of a recovery in external demand,” the central bank said in a statement.
The MAS said it will maintain its policy of “modest and gradual appreciation” of the currency. The level at which the Singapore dollar is centered will also remain unchanged, it said. The decision was predicted by 21 of 22 financial institutions surveyed by Bloomberg News.
The policy stance “is assessed to be appropriate for containing inflationary pressures, anchoring inflation expectations, and facilitating the restructuring of the economy towards sustainable growth,” the MAS said.
Price gains may be 3 percent to 4 percent this year, the MAS said today, compared with a previous estimate of 3.5 percent to 4.5 percent. Core inflation is forecast at 1.5 percent to 2.5 percent, it said, adding “it is expected to rise moderately in the latter half, reflecting persistent tightness in the labor market.”
GDP contracted 0.6 percent last quarter from a year earlier, according to today’s report. The government has warned that a clampdown on overseas labor, initiated in part because of voter unhappiness over the influx of foreigners, will hurt growth in Southeast Asia’s only advanced economy.
“It’s a question of setting the tone and really signaling that the Singapore economy is going through this sluggish growth but with a slight easing in terms of headline inflationary pressure,” said Selena Ling, an economist at Oversea-Chinese Banking Corp. in Singapore. “The lowering of the inflation forecast basically allows them a bit of policy headroom to not tighten further.”
Singapore’s manufacturing fell 11.3 percent last quarter from the previous three-month period, largely due to a contraction in the output of the biomedical production cluster, according to the Trade Ministry statement.
The city’s jobless rate fell to a five-year low in the fourth quarter as companies hired more local workers. Unit labor costs rose 4.1 percent last year, and the central bank said in October they may climb as much as 4 percent in 2013.
Shares of SMRT Corp., the island’s biggest subway operator, fell to a four-year low on April 1 after it said it expected a net loss in the fourth quarter due to deteriorating profitability amid increasing operating costs. Dozens of SMRT’s bus drivers from China held a strike in November over a wage dispute, the first in the city state in more than two decades.
Singapore’s economy grew 1.3 percent in 2012, the slowest pace in three years, and the government forecasts growth of 1 percent to 3 percent this year.
“The slowdown in GDP growth thus far is still not sufficient to alleviate the tightness in the labor market and remove support for continuing price pressures,” analysts led by Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore, wrote in a note this week.
Elsewhere in the Asia-Pacific region, India’s industrial production unexpectedly rose in February from a year earlier and New Zealand’s food prices slid for a second month in March.
Euro-area factory output may have gained in February from a month earlier, a Bloomberg survey showed. U.S. retail sales probably stagnated last month while producer prices may have risen from a year ago, two separate surveys showed.
Singapore’s inflation accelerated to the fastest in eight months in February as private transportation costs surged. Accommodation and car costs will probably account for three-fifths of inflation this year, Second Minister of Trade and Industry S. Iswaran said in Parliament this week.
“Continuing tightness in the labor market will add to domestic cost pressures, resulting in a slightly stronger pace of cost pass-through to prices of consumer services,” the MAS said today.
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