Policy of modest and gradual appreciation of S$ appropriate for now

(SINGAPORE) Even as GDP growth eases in the second half of 2010, economic activity will be sustained at high levels through the year, says the Monetary Authority of Singapore.

And with price pressures rising within expectations, the central bank says that the current monetary policy stance of a modest and gradual appreciation of the Singapore dollar 'remains appropriate' for now.

While GDP growth is likely to have peaked mid-year, after a blistering 18 per cent first-half pace, the underlying support for growth for the rest of 2010 is expected to remain largely intact, MAS says in its latest annual report for its 2009/10 financial year.

'There is sufficient momentum from the Asian economies and domestic industries that will continue to support Singapore's economic activity at a high level for the rest of the year,' MAS managing director Heng Swee Keat said at a media conference on the annual report yesterday.

Five quarters since hitting bottom during the downturn last year, Singapore's output has exceeded its pre-crisis peak by about 13 per cent, and GDP growth this year is projected at 13-15 per cent.

But 'considerable risks' and uncertainties remain in the global economy, particularly in Europe and the other major economies, MAS says.

Meanwhile, it expects higher global commodity prices and higher car prices to continue to push the headline inflation rate up for the rest of 2010.

Partly reflecting base effects, the inflation rate as measured by the consumer price index (CPI) - which hit 3.1 per cent in the second quarter - could reach about 4 per cent by Q4 this year, and will probably average 2.5-3.5 per cent for the full year.

Still, the pass-through of domestic business costs to retail prices is likely to be moderate, Mr Heng said. An initial cyclical productivity uptick in capital-intensive sectors could help temper costs for a while.

There is also the impact of the pre-emptive monetary tightening move in April when MAS re-centred Singapore's exchange rate policy band upwards and restored it on a gradual appreciation path.

MAS reviews and issues a statement on its monetary policy stance twice a year, in April and October.

Asked if it will do so a little more frequently, given today's volatile environment, Mr Heng said that the medium-term price stability focus of Singapore's monetary policy regime, and the policy band within which it manages the exchange rate, 'give us quite a bit of flexibility'.

Nonetheless, if there's any need to change the modus operandi, MAS will do so.

'In fact, today, we basically reaffirmed that our monetary policy remains appropriate,' Mr Heng said.

- The Business Times, 30 July 2010