S'pore pushes up currency to fight inflation

Singapore's central bank tightened monetary policy on Thursday to fight inflation by allowing its currency to go higher, and government data showed first-quarter economic growth was far stronger than expected.

The Monetary Authority of Singapore (MAS) conducts policy by steering the Singapore dollar within a secret trade-weighted band against a basket of currencies, not by adjusting interest rates.

It said it had moved the centre of the band up to the current level of the currency's trade-weighted nominal exchange rate.

After its announcement, the currency hit a record high of 1.3568 per US dollar, up around 1.7 per cent compared with before the announcement. It has gained 6 per cent this year.

Singapore's export-dependent economy, whose performance is seen by economists as a barometer of demand for Asian goods, expanded at an annualised, seasonally adjusted rate of 16.9 per cent in the first quarter, an advance estimate showed.

Drugs and electronics manufacturing led the way, pushing growth above economists' consensus forecast of 11.5 per cent.

Economists said the spurt gave the central bank room to tighten policy because it assuaged fears that a US recession would drag the US$166 billion Singapore economy into a sharp slowdown, although they saw growth easing from last year.

'The GDP figures were stronger than what the market had predicted and that gave the Monetary Authority confidence to tighten the policy,' said Joseph Tan, an economist at Fortis.

Mr Tan said he expected the Singapore economy to grow 5.7 per cent this year, near the top of the official 4-6 per cent forecast range but down from last year's 7.7 per cent.

The MAS can alter monetary policy by adjusting the pace at which the currency rises, by changing the centre of the band in which it trades, or by widening the trading band. Some economists said a shift in the band's centre was the most aggressive move.

In its twice-yearly policy statement, the MAS said: 'Against (the) backdrop of continuing external and domestic cost pressures, an upward shift of the policy band at this point will help to moderate inflation going forward, while providing support for sustainable growth in the economy.'

'There will be no change to the slope or width of the policy band,' it added.

Some economists said the stronger Singapore dollar boosted sentiment in other Asian currencies and lifted the yen.

Strategists raised their forecasts for the Singapore dollar , with end-2008 forecasts ranging from 1.30 to 1.35 per US dollar, a gain of up to 4.2 per cent from Thursday's record.