Singapore Should Allow Faster Currency Appreciation, IMF Says

By Shamim Adam

Aug. 14 (Bloomberg) -- Singapore should allow its currency to strengthen at a faster pace to combat inflation, the International Monetary Fund said, predicting that consumer price gains in the island-nation will remain ``elevated.''

``Ensuring that inflation expectations remain well anchored is a policy priority,'' the Washington-based lender said in a statement on its Web site late yesterday. Still, ``given monetary policy lags, it would be sensible to assess the impact of the monetary tightening already in the pipeline before adjusting the policy stance.''

The island's currency, which climbed to its strongest in more than a decade earlier this year, has since slid and is Asia's worst performer this quarter amid concern growth will slow further. Singapore last week cut its 2008 growth forecast for a second time this year as exports fell, joining its neighbors in signaling a deeper slowdown.

The Singapore economy faces ``downside risks to growth'' as global demand weakens, the IMF said.

``Macroeconomic policies should remain flexible and pragmatic and seek an appropriate balance to sustain solid growth while containing inflationary pressures and maintaining macroeconomic stability,'' the lender said in the report, known as an Article IV Consultation.

The Singapore dollar traded at S$1.4079 against the U.S. currency at 10:17 a.m. in Singapore, compared with S$1.4053 yesterday. The currency has dropped 3.4 percent this quarter, after climbing 5.7 percent in the first half.

Inflation Upsurge

``Given the recent upsurge in inflation, a moderately faster pace of appreciation would help ensure that price expectations remain well-anchored and facilitate the needed external adjustment,'' the IMF said. ``The Singapore dollar remains weaker than the level implied by long-term fundamentals.''

The Monetary Authority of Singapore has maintained an appreciation policy on its exchange rate since April 2004, and this year allowed the currency to rise at a faster pace against the U.S. dollar to combat the highest inflation rate since 1982. It said this week that its stance remains ``appropriate.''

The central bank conducts monetary policy by guiding the local dollar within an undisclosed band of trade-weighted currencies of its major trading partners. The next monetary policy review is in October and most economists expect the authority to refrain from allowing faster currency appreciation.

Singapore's government on Aug. 8 cut its forecast for growth this year to between 4 percent and 5 percent, from an earlier estimate of as much as 6 percent expansion. The economy will expand 4.5 percent this year and next, the IMF forecasts.

The IMF ``acknowledged the difficulty of additional tightening when the external environment remains fragile, but observed that the width of the exchange rate policy band could provide flexibility to cope with adverse shocks,'' it said.

Singapore's consumer prices rose 7.5 percent in June from a year earlier, and the central bank last month raised its 2008 inflation forecast to a range of 6 percent to 7 percent.

Consumer price gains will average 6.7 percent this year, before easing to 3.5 percent in 2009, the IMF predicts.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net