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Singapore, amid signs of solid growth, tightens monetary policy for first time in 6 years

SINGAPORE — The central bank has tightened monetary policy and signalled that it would seek an appreciation in the Singapore dollar, amid solid economic growth prospects and signs of improvement in the labour market.

SINGAPORE — The central bank has tightened monetary policy and signalled that it would seek an appreciation in the Singapore dollar, amid solid economic growth prospects and signs of improvement in the labour market.

The move by the Monetary Authority of Singapore (MAS), which uses the exchange rate as its main policy tool, came as advance estimates on Friday (April 13) showed that the Republic’s economy grew more than expected in the first quarter of the year.

Going forward, experts say Singapore’s growth momentum should continue to sustain in a steady pace, led by trade-related industries. Weaker segments like construction and domestic-oriented services should also “improve”.

“The Singapore economy is likely to remain on its steady expansion path in 2018,” MAS said, in announcing a widely expected move to “increase slightly” the slope of the Singapore dollar’s policy band from 0 per cent previously.

This is the first time in six years that the central bank has tightened the band, officially known as the Singapore dollar nominal effective exchange rate (S$NEER) policy band. The width of the S$NEER and the level at which it is centred were left unchanged.

MAS guides the Singdollar against a basket of its counterparts, and adjusts the pace of its appreciation or depreciation by changing the slope, width and centre of a currency band. It does not disclose details on the basket, or the band, or the pace of appreciation or depreciation.

Explaining the decision in its bi-annual statement, MAS said S$NEER has appreciated in the upper half of the policy band since October 2017, apart from a brief period of decline in early 2018. “This development reflected, in part, broad-based US dollar weakness and depreciation in a number of regional currencies against the Singapore dollar,” the central bank added.

Twelve out of 19 analysts in a Reuters poll had expected a tightening of the exchange-based policy.

The MAS’s tightening move is a “testament to the confidence that the Singapore economy is on a steady expansion path this year,” said Ms Selena Ling, head of treasury research & strategy at OCBC Bank. 

In their research note, DBS analysts, Mr Neel Gopalakrishnan, Mr Eugene Leow, and Mr Philip Wee, noted that the “trade tension” was a factor in Singapore’s decision to keep its return to a “mild” appreciation stance. Linking “the measured adjustment to global trade tensions” with the stable growth/inflation outlook, they expected “no urgency to follow through with another tightening at the next review”.

MAS is likely to allow the S$NEER to continue to drift within the “slightly steeper slope” towards the next monetary policy statement in October, Ms Ling added, in a path consistent with a “modest and gradual appreciation,” while closely monitoring economic developments.

“The largest downside risk remains the rising trade tensions, albeit recent comments by US President Trump suggest a more conciliatory approach to China as well as possibly rejoining the Trans-Pacific Partnership,” Ms Ling said.

UOB economist Francis Tan maintains a mildly positive view in the US dollar to Singapore dollar rate, and is keeping the bank’s year-end USD/SGD forecast at S$1.32. The DBS analysts’ views remain intact for USD/SGD rate to rise towards S$1.38 for the rest of the year.

Separately on Friday, the Ministry of Trade and Industry said advance estimates showed that the Singapore economy had expanded by 4.3 per cent year-on-year in the first quarter, following the growth of 3.6 per cent for the fourth quarter last year.

The manufacturing sector saw a sharp turnaround from the 14.8 per cent contraction in the last quarter of 2017, and grew 23.3 per cent in the first three months of 2017, on a quarter-on-quarter seasonally-adjusted annualised basis.

MAS said Singapore’s economy should continue to grow at a “broadly steady pace” in the months ahead, “barring a setback in global trade”. It cautioned that an escalation of the trade dispute between the United States and China remains possible, and that global trade would be significantly hit if that happens.

The central bank said it also expects upward pressures on core inflation to persist over the course of this year and beyond, underpinned by an improving labour market.

For this year, MAS Core Inflation, which excludes the costs of accommodation and private road transport, is projected to come within the upper half of the 1 and 2 per cent forecast range, while headline inflation is expected to be in the upper half of the 0 to 1 per cent range.

Looking ahead, the central bank said: “On the whole, GDP growth in 2018 should come in slightly above the middle of the forecast range of 1.5 to 3.5 per cent. Productivity will continue to contribute to growth this year, even as total employment is projected to expand following a marginal contraction in 2017.” WITH AGENCIES

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