Singapore Dollar to Rise 1.2% on Inflation, UBS Says

By Patricia Lui

Aug. 27 (Bloomberg) -- Singapore's dollar will rise 1.2 percent in three months time to reach S$1.40 as persistent inflation prevents the central bank from stalling the currency's appreciation, UBS AG said.

Singapore's inflation slowed in July by less than economists had estimated, after holding at 26-year highs in each of the three previous months. The trade ministry urged policy makers to maintain vigilance on inflation while ensuring the currency doesn't hurt exports by appreciating too sharply.

``It remains too early for the central bank to contemplate a move to a neutral bias, much less an outright easing by shifting the policy band lower,'' New York-based analyst Benedikt Germanier wrote in a note yesterday. ``We do not rule out a more gradual appreciation at the October meeting.''

The city-state's currency traded at S$1.4170 per U.S. dollar at 11:50 a.m. local time, up 0.6 percent, according to data compiled by Bloomberg. It has declined 4 percent this quarter to be the worst performer among Asia's 10 most-active currencies on concern a slowing economy and shrinking exports will spur policy makers to support growth rather than tackle inflation.

The central bank conducts monetary policy by guiding the local dollar within an undisclosed band against a trade-weighted basket of currencies belonging to major trading partners.

Investors should ``not be deceived'' by July's lower year- on-year July inflation which was ``driven primarily by the base effect from the 2 percentage point GST hike in July 2007,'' the UBS note read, adding that price pressures is ``best judged'' by the month-on-month number which was the highest since January.

Consumer Prices

Consumer prices rose 6.5 percent last month from a year earlier, compared with 7.5 percent in each of the previous three months, the government said Aug. 25. Economists had expected a 6.1 percent increase, according to a Bloomberg survey. On a month-on-month basis, consumer prices rose 1.2 percent, after declining 0.3 percent during June.

UBS also said comments from the trade ministry following the release of the July inflation which urged policy makers to curb inflation.

The Monetary Authority of Singapore allowed a faster pace of appreciation in October 2007 and announced a one-off strengthening at its last policy meeting in April to rein in inflation. It holds its next biannual policy review in October.

Singapore's government this month cut its 2008 growth and export forecasts and warned of a ``bumpy year ahead.''

The economy may grow at the lower end of the government's 4 percent-to-5 percent forecast range this year, Trade and Industry Minister Lim Hng Kiang said yesterday. Singapore recognizes the risk of very low growth or recessionary conditions globally in the future, he said.

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net