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Economy

Singapore surprises with monetary tightening as Q3 GDP grows 6.5%

Central bank's move follows South Korea and New Zealand; COVID clouds outlook

Singapore's economy is recovering from the worst periods of last year, but the pandemic continues to haunt the city-state.   © Reuters

SINGAPORE -- Singapore's central bank on Thursday tightened its monetary policy for the first time in three years -- an earlier-than-expected move as the country seeks to reopen its coronavirus-hit economy and manage inflationary pressures.

The city-state, which also reported a preliminary 6.5% increase in gross domestic product for the July-September quarter, follows countries such as South Korea and New Zealand in backing away from an accommodative monetary stance.

Singapore's monetary policy is based on exchange rates, whereby the Singapore dollar is managed against a basket of major trade partners' currencies. The last round of tightening was in October 2018.

The Monetary Authority of Singapore, the central bank, on Thursday said it would slightly increase the slope of the Singapore dollar's exchange policy band from 0%, to guide a modest appreciation of the currency.

"Barring the materialization of tail risks such as the emergence of a vaccine-resistant virus strain or severe global economic stresses, the Singapore economy should remain broadly on an expansion path," the central bank said in its semiannual monetary policy statement.

During the pandemic, central banks around the world lowered policy rates to support their economies. In Singapore, the MAS eased its policy from March last year, by reducing its target appreciation rate to 0% while recentering the exchange rate band downward.

Recent inflation was a major factor in the decision to tighten this time, according to the MAS. While some industries continue to suffer from COVID-19's effects, Singapore's overall consumer price index rose 2.4% on the year in August. "External and domestic cost pressures are accumulating, reflecting both normalizing demand as well as tight supply conditions," the central bank noted.

Still, the tightening took some economists by surprise. The MAS was "unexpectedly hawkish," said Selena Ling, head of treasury research and strategy at Oversea-Chinese Banking Corp.

"The policy concerns appear to be more persistent," she continued, pointing to "broader price pressures from a confluence of supply chain problems, rising energy prices, a foreign manpower crunch due to border closures, etc." Ling also noted that there are "policy-driven cost pressures" as the government plans to increase wages in some lower-paid sectors.

Meanwhile, OANDA senior market analyst Jeffrey Halley pointed out that "the early move implies [the MAS] believes global inflationary pressures are going to get worse before they get better."

"Given that the economy is in a reopening phase, the MAS likely believes that if consumers were hit with rising costs, it could undermine the economic recovery if those costs subdued the domestic consumption component," he said.

Elsewhere in the Asia-Pacific region, South Korea's central bank raised interest rates in August by 25 basis points to 0.75%, while New Zealand's counterpart earlier this month raised its key rate by 25 basis points to 0.50%.

The Ministry of Trade and Industry's preliminary GDP data, meanwhile, reflects the country's recovery from last year's worst periods, backed by fast vaccination progress.

The manufacturing sector grew 7.5% in the quarter from a year earlier, while the services sector was up 5.5% and the construction sector grew 57.9%.

"In particular, the electronics and precision engineering clusters continued to post strong growth, driven by sustained global demand for semiconductors and semiconductor equipment," the ministry said in a statement.

On a quarter-on-quarter basis, the economy grew 0.8% in the third period.

But the recent resurgence of COVID-19 infections in the city-state and tighter restrictions that started last month will likely weigh on the economy for the rest of the year.

Despite a full vaccination rate above 80%, the country reported a record 3,703 new cases last Saturday, though the vast majority of infections in the current outbreak are mild or asymptomatic.

External growth momentum has also been waning, partly due to the economic slowdown in China. Singapore's benchmark non-oil domestic exports showed declining growth rates for the second month in a row in August, at 2.7%.

The ministry in August projected a GDP growth rate of 6% to 7% for the full year, rebounding from last year's 5.4% contraction. The government is expected to update the annual growth projection next month.

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