Singapore eases monetary policy on weaker growth prospects

The Monetary Authority of Singapore eased its monetary policy on Friday after a six monthly review of the policy band of the Singapore dollar against a basket of foreign currencies. The Ministry of Trade and Industry released its advance estimates for the third quarter on the same day, showing that the Singapore economy avoided a technical recession. The Monetary Authority said it expected future growth to be below the trend of 3-5 percent and inflation pressures to ease. WEAKER GROWTH PROSPECTS The Ministry of Trade and Industry said it expected the global economic conditions to soften, with Singapore's electronics cluster bearing the brunt. "For the rest of the year, growth could be weighed down by the softening global economic conditions. In particular, the electronics cluster is expected to remain weak due to the easing of global electronics demand," it said. Nevertheless, the full-year growth will still be around 5 percent, thanks to the strength of the biomedical sector in the near term. The economy grew by 5.9 percent year on year in the third quarter. On a seasonally-adjusted quarter-on-quarter annualized basis, the economy grew by 1.3 percent to avoid a technical recession which is defined as two consecutive quarters of quarter- on-quarter contraction. It contracted by 6.3 percent on a seasonally-adjusted quarter-on-quarter annualized basis in the second quarter. The ministry said that the strength of the biomedical sector helped lift manufacturing growth to 13.2 percent year on year. The other sectors were relatively weak, with construction growing by just 0.4 percent and services expanding by 3.6 percent, respectively. INFLATION EXPECTED TO EASE The Monetary Authority said on Friday that the prospects for growth in Singapore's major trading partners have deteriorated given the stresses and fragility in advanced economies. With the slowdown in demand, growth in the Singapore economy could fall below its potential rate of 3-5 percent. It expects core inflation to ease next year, although headline inflation could stay elevated in the near term reflecting the higher imputed rental cost of owner-occupied housing. EASING MONETARY POLICY The central bank said it will continue with the policy of "a modest and gradual appreciation" of the Singapore dollar. Given the expected moderation in core inflation, the slope of the policy band will be reduced, with no change to the width of the band and the level at which it is centered. This means that the pace of appreciation for the Singapore dollar is expected to slow. Singapore adopts an exchange rate-based monetary policy, allowing the local currency to appreciate to curb imported and domestic inflation when price pressures are high. It manages the value of the Singapore dollar against a basket of currencies and the trade-weighted exchange rate fluctuates within a policy band. The Singapore dollar hit record highs against the U.S. dollar in July after the monetary authority tightened monetary policy for three times since April 2010.