SINGAPORE — The central bank has further tightened its monetary policy as it expects Singapore's economy to remain on a steady expansion path, with inflation increasing modestly.

The Monetary Authority of Singapore (MAS) announced on Friday (Oct 12) that it will allow the Singapore dollar to appreciate slightly in a measured adjustment, following an earlier round of tightening.

In its April review, the MAS had tightened its policy from a neutral stance — the first time it had done so in six years. This was on the back of strong economic growth and upward pressures on core inflation, supported by signs of improvement in the labour market.

The MAS now expects the economy to expand at a slower pace for the rest of this year and into 2019, and projects that core inflation will rise modestly in the near term before stabilising just below 2 per cent, it said in its statement.

Based on flash estimates from the Ministry of Trade and Industry released on Friday, Singapore's economy grew 2.6 per cent in the third quarter of this year compared with the same period a year ago. This is lower than the year-on-year growth in the second quarter, which was 4.1 per cent.

However, on a quarter-on-quarter seasonally adjusted annualised basis, it grew 4.7 per cent, faster than the 1.2 per cent growth in the previous quarter.

The drivers of economic activity have shifted, the MAS noted, with the contribution from the manufacturing sector waning, a reflection of the maturing of the global electronics cycle.

Manufacturing, which has been the main driver of Singapore's economy, expanded 4.5 per cent compared to a year ago — a significant slowdown from the 10.6 per cent growth in the second quarter.

The MAS expects gross domestic product growth to come in within the upper half of the 2.5 to 3.5 per cent forecast range, and moderate slightly in 2019.

As for inflation, the central bank expects inflation to pick up on higher global food and oil prices, as well as a faster pace of wage growth.

"Nevertheless, the extent of price increases will be restrained by greater market competition in several consumer segments, such as telecommunications, electricity and retail," it added.

The MAS expects core inflation to level off at just below 2 per cent over the medium term, coming in within the forecast range of between 1.5 and 2 per cent for 2018.

Economists were divided on where MAS would be heading as it had to balance between an inflation that is creeping upwards and expectations for growth to ease amid trade tensions and a slowing down of the global economy.

In a poll by news agency Reuters on Oct 5, 11 out of 20 economists predicted that the central bank would be tightening its monetary policy in the October review.

The other nine were wary of how the trade dispute between two of Singapore's top trading partners — the United States and China — would impact the export-oriented city-state and expected that this was enough for the central bank to stand pat on its current policy.

Unlike most other central banks that use interest rates, the MAS uses the exchange rate as its main policy tool to tackle inflation and growth.

Officially known as the Singapore dollar nominal effective exchange rate policy band, 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.

Ms Sian Fenner, lead Asia economist at research firm Oxford Economics, said that the slope is likely to be more modest compared with other tightening cycles.

"We estimate the slope at between 0.5 and 1 per cent. We do not believe today’s outcome will have any material effect on the Singapore dollar," she added.

"Overall, against a backdrop of cooling economic momentum with the risks tilted to the downside, we believe there will be little impetus for further tightening in 2019."