P.R. Venkat, Sam Holmes & Costas Paris
The Wall Street Journal
Singapore’s central bank tightened monetary policy aggressively Wednesday to cool an economy that posted the fastest growth on record in the first quarter and faces rising inflationary risks.
The government also raised its projections for economic growth and inflation for this year, highlighting the sharp rebound in the bellwether for Asia’s economy, a driving force behind the world’s recovery from the financial crisis.
Gross domestic product soared 32.1% in the quarter ended March 31 from the previous three months in annualized, adjusted terms, leaping from a 2.8% contraction in the fourth quarter of last year.
That was the fastest pace on record going back to 1975, and topped all forecasts in a Dow Jones Newswires survey of 10 economists. The poll tipped an expansion of 19.9%, with estimates ranging from 9.5% to 28%.
“This is not only a Singapore story. It’s an affirmation of Asia’s strength compared with the rest of the world,” said Endre Pedersen, executive director of fixed income at MFC Global Investment Management.
“The fact that MAS decided to act now rather than waiting six months, even though inflation is not yet a pressing issue, is very significant” after the “extremely good” GDP numbers and higher forecast for this year.
The force of the Monetary Authority of Singapore’s tightening was unprecedented. It revalued upward its targeted trading band for the Singapore dollar—its main policy lever—and shifted its stance to a “modest and gradual appreciation” from zero appreciation of the local currency.
The MAS guides the Singapore dollar within an undisclosed, trade-weighted band against a basket of other currencies because foreign trade dwarfs Singapore’s small domestic economy. It was the first time the central bank has made such a “double-barrelled” change in monetary policy. Past policy changes have involved one or the other, but never a simultaneous shift in the center and the slope of the trading band.
The MAS was the latest central bank in Asia to tighten policy, as authorities’ priorities gradually shift from spurring the recovery to making sure inflation—which for the most part remains subdued—doesn’t get out of hand. Australia, Malaysia, and India have started to raise interest rates. Others, including China and the Philippines, are moving to soak up excess liquidity in banking systems that analysts say is starting to light a fire under real estate and other asset prices.
The upbeat tone of the statements from Singapore’s central bank and government suggests concerns that the recovery could stall later in the year have been displaced by worries that inflation could pose risks for the longer-term health of the economy.
The government raised its inflation outlook for this year to 2.5%-3.5% from 2%-3% and lifted its GDP growth forecast to between 7% to 9% from 4.5% to 6.5%.
“The Singapore economy has rebounded from the downturn and is expected to continue on its firm recovery path given the more favourable global economic outlook. At the same time, inflationary pressures are likely to pick up, driven by rising global commodity prices as well as some domestic cost factors,” the central bank said in a statement.
The news sent the Singapore dollar sharply higher, with the U.S. currency falling to S$1.3783 from around S$1.3927. Midday Wednesday in Singapore, the U.S. dollar was at S$1.3782, its lowest level since August 2008.
A person familiar with the central bank’s thinking said any thoughts in the central bank about holding steady Wednesday were evaporated after the MAS got word of the strong GDP data.
“There were are actually questions on whether the tightening is enough to put the breaks on a probable overheating and bubbles,” the person said. “They certainly don’t want this to get out of control after the higher inflation expectations,” the person added, without elaborating, adding that he expects the MAS to “keep a very a close eye on the property market and loan growth.”
HSBC economist Robert Prior-Wandesforde said Singapore may see a double-digit increase in GDP this year. “You wonder if the exchange rate is enough in itself to cool things down.”
ING economist Tim Condon said the MAS’s outlook for 2010 was among the most bullish assessments he has seen from a central bank. The decision to act may be explained by the need to pre-empt a revaluation of the Chinese yuan, he said.
The news has set a bullish tone for the Singapore dollar, which could become a “slight outperformer” among Asian currencies in coming months, said Westpac.
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