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Economy

Singapore joins regional monetary tightening rush

Inflation spurs central bank's second move this year despite GDP slowdown

The Monetary Authority of Singapore manages the Singaporean dollar against a basket of currencies of major trade partners.   © Reuters

SINGAPORE -- The Singaporean central bank tightened its monetary policy on Friday, braving economic uncertainties and following neighbors like Indonesia and the Philippines, which have repeatedly raised rates to support their currencies.

The Monetary Authority of Singapore, the central bank, said in its semiannual monetary policy statement that it would slightly increase the slope of the Singapore dollar's exchange policy band. A steeper upward slope would allow the currency to strengthen.

Instead of interest rates, the MAS bases its monetary policy on exchange rates, whereby the Singaporean dollar is managed against a basket of currencies of major trading partners. The MAS tightened in April for the first time in six years by slightly increasing the policy band slope to guide a gentle appreciation. The current stance is "a modest and gradual appreciation path."

The latest move to tighten comes as Singapore's economy slows. Preliminary gross domestic product figures, also released on Friday, show the economy grew 2.6% between July and September compared with the same period the year before, down from a revised 4.1% in the April-June quarter.

"The manufacturing sector grew by 4.5% on a year-on-year basis in the third quarter, slower than the 10.6% growth in the previous quarter," the Ministry of Trade and Industry said in a statement.

The trade tensions between Washington and Beijing are likely to impact the global economy more in the coming months, raising additional uncertainty in Southeast Asia. Nevertheless, the MAS tightened because of rate hikes in the U.S. and rising inflation at home. "Barring a significant setback in global growth, the Singapore economy should expand at a pace close to potential in 2019," the authority said in its policy statement. 

singapore gdp

With the U.S. Federal Reserve expected to raise its rates further, the Singaporean dollar has fallen about 5% against the greenback in the last six months, and economists foresee more depreciation toward the end of the year.

Furthermore, Singapore's core inflation rate in July and August hit 1.9%, the highest level in four years. A tighter monetary policy should help counter that, since Singapore imports many consumer products.

"[The core inflation] will experience modest but continuing pressures, before levelling off at just below 2% over the medium term," the MAS noted.

Emerging Asia has been feeling the ripples from turmoil in other markets, such as Turkey and Argentina, as well as the U.S. rate pressure. Indonesia has raised its policy rate five times since May, to 5.75% from 4.25%, to support the rupiah. The Philippines and India have also hiked policy rates multiple times this year -- to 4.5% from 3% for the former, and to 6.5% from 6% for the latter.

Since Singapore's economy is closely connected to its Southeast Asian neighbors, their economic turbulence could affect the city-state's currency and business activity.

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