SINGAPORE—Singapore's central bank Friday eased monetary policy for the first time in two years, as a worsening global economic outlook threatens to derail the island nation's export-dependant economy.The Monetary Authority of Singapore will continue to guide the local currency higher but at a slower pace, effectively putting less emphasis on containing inflation and more on supporting the economy, which is facing stiffer headwinds from weakening demand in the U.S. and Europe and a slowdown in China.
The move came as the government reported the economy posted only meager growth in the third quarter, narrowly avoiding a technical recession. The economy grew at annualized pace of 1.3% in the third quarter from the second. That was better than a 0.7% expansion tipped by economists but a weak bounce from a contraction of 6.3% in the second quarter.
"The MAS is clearly dovish on growth and it is also slightly dovish on inflation. We barely escaped recession in the third quarter as most of the growth came from the highly volatile biotech sector. The underlying trend is still for softer growth," said Edward Lee, an economist at Standard Chartered Bank.
Though Friday's data showed more growth than expected in the third quarter, most economists don't plan to revise their full-year estimates. A post-data poll of 10 found the economy is expected to expand 5.1% in 2011. And nine said it's too early to predict what the central bank might do in the next six months as that would depend on events in the U.S. and Europe. One declined to comment.
Friday's central-bank decision in Singapore follows a surprise interest rate cut by the Indonesian central bank earlier this week and showed Asian authorities are taking steps to shore up the region's economy, which has been buffeted by the financial turmoil in the euro zone.
The Monetary Authority of Singapore, which uses the Singapore dollar's exchange rate as its main policy lever, reduced the slope of the trading band but made no change to the width or level of the band.
It said it will continue to target a "modest and gradual appreciation" of the Singapore dollar's nominal effective exchange-rate policy band in the period ahead.
"Given the stresses and fragility in the advanced economies, the prospects for growth in Singapore's major trading partners have deteriorated," the central bank said in a statement.
The Singapore dollar, which had fallen in recent weeks on expectations Singapore would ease monetary policy, rose sharply on the news. The reaction suggested that some traders may have expected a more aggressive policy easing by the central bank.
The central bank guides the local currency within an undisclosed, trade-weighted band, using the exchange rate rather than interest rates as its main monetary-policy tool because foreign trade dwarfs domestic demand in Singapore's nearly US$220 billion economy.
The MAS had been expected to loosen its stance. All 16 economists surveyed by Dow Jones Newswires forecast some form of easing by the central bank. Twelve correctly predicted the MAS would reduce the slope of the band.
It was the first time the MAS has loosened monetary policy since April 2009, when it sought to help the economy ride out a global economic slump. It tightened at its past three quarterly policy reviews, to stem inflationary pressures that picked as the economy rebounded strongly from the global crisis.
The MAS said the weak external environment likely to persist, and that the domestic economy will expand more slowly in 2012 and growth could be below its potential rate of 3%-5%.
The central bank also said the slowdown in domestic economic activity will reduce tightness in the labor market and alleviate price pressures.
"As a result, core inflation should gradually ease from an estimated 2.3% in fourth quarter this year to 1.5% at the end of 2012," it said.
Although, it warned that headline inflation will be elevated for the rest of 2011 before easing, especially in the second half of 2012.
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