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Singapore Tightens Monetary Policy Unexpectedly As Inflation Threats Prevail

MAS 041312

Singapore's central bank on Friday unexpectedly tightened monetary policy by allowing faster gains in the currency amid persistent inflationary pressures. Also, a separate report released earlier in the day showed that the economy rebounded in the first quarter after a poor fourth quarter performance.

In its semi-annual monetary policy statement, the Monetary Authority of Singapore, or MAS, said that it is increasing the slope of the Singapore dollar Nominal Effective Exchange Rate, or S$NEER, policy band slightly, allowing faster appreciation of the currency.

The central bank also said it is restoring a narrower policy band but there will be no change to the level at which the band is centered. The move is expected to help anchor inflation expectations, ensure medium-term price stability, and keep growth on a sustainable path, the MAS said.

The bank found that the tail risks in the key industrialised economies have receded, but global growth is likely to remain below trend in the near term. Against this backdrop, MAS expects the Singapore economy to grow at a modest pace of 1-3 percent in 2012.

The first quarter GDP report showed that Singapore's GDP expanded a seasonally adjusted 9.9 percent on an annualized basis compared to the previous quarter following a 2.5 percent contraction in the preceding quarter.

In its previous policy review in October, the MAS maintained the S$NEER policy band on a modest and gradual appreciation path but the slope of the policy band was reduced as economic activity was expected to slow.

In the April monetary policy statement, the MAS said that it will continue with the policy of a modest and gradual appreciation of the S$NEER policy band.

The bank sees persistent core inflationary pressure in the economy. However, inflation will likely ease in the latter half of the year, it said.

Meanwhile, the MAS revised up its 2012 outlook for headline and core inflation rates and said it will remain elevated over the next few months.

The central bank's 2012 core inflation forecast that excludes private road transport and accommodation costs was revised up to 2.5-3 percent from its previous forecast of 1.5-2 percent. The headline inflation forecast was raised to 3.5-4.5 percent from 2.5-3.5 percent previously.

MAS expects external inflationary pressures to be sustained, largely due to higher oil prices, while the domestic labor market is expected to remain tight. "The pass-through of costs to consumers is therefore likely to continue, though at a reduced pace," it said.

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