Asian investment

Singapore tightens monetary policy as Q3 GDP grows 6.5%

SINGAPORE — Singapore’s central bank on Thursday tightened its monetary policy for the first time in three years, 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 South Korea, New Zealand and others 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.

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.

“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.

“At the same time, external and domestic cost pressures are accumulating, reflecting both normalizing demand as well as tight supply conditions.”

While some industries continue to suffer in the pandemic, recent consumer price index data pointed to inflation, with Singapore’s overall CPI rising 2.4% on the year in August.

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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