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Singapore’s central bank said Asia faces growing risks from capital inflows and called for “close monitoring” by policy makers to avoid a disorderly reversal.
The region’s “brighter” economic outlook compared with the rest of the world may result in higher inflationary pressures, the Monetary Authority of Singapore, or MAS, said in a twice-yearly review today. Singapore’s economy, which may hit a “soft patch” in the coming quarters, should keep expanding, it said.
The region’s “brighter” economic outlook compared with the rest of the world may result in higher inflationary pressures, the Monetary Authority of Singapore, or MAS, said in a twice-yearly review today. Singapore’s economy, which may hit a “soft patch” in the coming quarters, should keep expanding, it said.
“Inflationary pressures remain significant in Asia,” the central bank said. “Large capital inflows into the region have continued to fuel activities and prices in the asset markets, which could also pose a risk to the inflation outlook.”
Growth in Asia is outpacing the rest of the world, prompting policy makers to raise interest rates ahead of their counterparts in the U.S. and Europe to fight inflation and prevent asset price bubbles. Singapore’s central bank signaled this month it will allow faster gains in its dollar, its main tool to manage inflation, after undertaking a one-time revaluation in April.
“The policy decision was made on the assessment that the level of economic activity would remain high, as the domestic economy would continue to expand, albeit at a slower and more sustainable pace,” the central bank said. “Compared to this year, when the manufacturing sector experienced a sharp surge in activity, gross domestic product growth next year will be driven more by the services sector.”
OVERSEAS DEMAND
Singapore has remained vulnerable to fluctuations in overseas demand for manufactured goods even after the government boosted financial services and tourism. The International Monetary Fund this month lowered its 2011 forecast for world growth, citing high unemployment, public debt and fragile banking systems as risks.
“The outlook for Singapore’s key trading partners will remain uneven,” according to the report. “Notably, the advanced economies will continue to face significant hurdles in transiting from public sector-driven to private demand-led growth. While the risk of the developed economies slipping back into recession has generally receded, final demand is likely to remain sluggish.”
The city’s two casino resorts run by Genting Singapore Plc and Las Vegas Sands Corp. have attracted millions to its gaming centers, while employment growth is boosting spending at malls and restaurants. The central bank reiterated the government’s forecast for a 2010 expansion of as much as 15%, and said the $182 billion economy will “grow in line with its potential” in 2011, without providing figures.
CURRENCY GAINS
The Singapore dollar has gained more than 8% against the U.S. currency this year. At its April monetary policy review, the central bank said it would shift the local dollar to a stronger range to trade in and sought an appreciation thereafter, the first such combined move in its history.
On Oct. 14, the central bank said it will steepen and widen the currency’s trading band while continuing to seek a “modest and gradual appreciation.”
The Singapore dollar “has fluctuated in the upper half of the exchange-rate policy band” since the April policy review, the monetary authority said in today’s report.
Singapore’s inflation last month accelerated to the highest level since January 2009, rising 3.7% from a year earlier. Consumer price gains are forecast to quicken to about 4% by the end of the year, the central bank said today.
Prices will average between 2.5% and 3% in 2010 and will be between 2% and 3% next year, it said. Inflation may be driven by higher global commodity prices and domestic labor and accommodation costs, the central bank said.
“Given these upside pressures to inflation, MAS deemed it appropriate to tighten monetary policy at this juncture to dampen external inflation as well as to provide the necessary macroeconomic restraint on domestic economic activity, thereby ensuring that cost and price pressures do not become entrenched,” according to the report.
