Singapore Should Allow Stronger Currency, 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, even as the nation faces a worsening slowdown in economic growth.

``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, predicting consumer price gains will stay ``elevated.''

The Singapore dollar, 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 slump. The central bank, which guides the currency within a trading range against an undisclosed basket, may have to slow the pace of its appreciation, Standard Chartered Plc said.

``Exports have been lackluster for the past year and the stronger Singapore dollar would do more damage to exports,'' Alvin Liew, an economist at Standard Chartered in Singapore, said in an interview with Bloomberg Television today. The central bank ``will probably be switching to a more benign monetary policy, but still on an appreciation trend.''

Singapore last week cut its 2008 growth forecast for a second time this year as exports fell, joining its Asian neighbors in signaling a deeper slowdown. Still, the central bank said this week its currency stance remains ``appropriate.''

The Singapore dollar traded at S$1.4088 against the U.S. currency at 12:50 p.m. in Singapore, compared with S$1.4053 yesterday. The currency has dropped 3.5 percent this quarter, after climbing 5.7 percent in the first half.

`Downside Risks'

The 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 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.

``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.''

Most economists expect the central bank to refrain from allowing faster currency appreciation at its next monetary policy review in October.

Growth Forecast

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. The economy will expand 4.5 percent this year and next, the IMF forecasts.

The island's trade promotion agency now expects exports to drop between 2 percent and 4 percent in 2008, from an earlier estimate of growth of 2 percent to 4 percent.

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

The central bank may want to assess the impact of the monetary tightening already planned before adjusting its policy stance, the IMF 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