MAS 'in no rush' to tweak exchange rate policy

The economic outlook is brightening and inflation is creeping up, but the Monetary Authority of Singapore (MAS) is expected to leave its exchange rate policy unchanged when it meets next week, most economists said.

They believe the central bank is "in no rush" and policy tweaks could come only next year if the economy strengthens further and growth continues broadening to benefit more sectors.

The MAS uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth. The rate is allowed to float within a policy band that can be adjusted when monetary policy is reviewed.

A stronger currency, which corresponds to tighter monetary policy, counters inflation by making imports cheaper in Singdollar terms, while a weaker Singdollar helps lift growth by making exports cheaper abroad.

The exchange rate is managed against a basket of currencies of Singapore's major trading partners. The Singdollar policy band is now on a path of zero appreciation against the currencies of key trading partners - a "neutral" policy stance put in place in April last year amid slow growth and low inflation.

But the economic environment has since become slightly rosier on the back of improving global trade.

In particular, the manufacturing sector is being lifted by strong global demand for semiconductors and related equipment. It expanded 11.2 per cent in the first eight months of the year - the highest since April 2011 and well above the 3.6 per cent for the whole of last year.

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  11.2% How much manufacturing expanded in the first eight months of this year - the highest since April 2011 and well above the 3.6% for the whole of last year.

This has helped lift overall growth, with the effects gradually being felt in other segments of the economy such as trade-related services.

Despite this, most economists expect the MAS to stand pat.

"MAS is likely to maintain its policy stance and wait until April next year for clearer signs that the recovery is sustainable," said CIMB Private Bank economist Song Seng Wun.

Meanwhile, core inflation - another key factor in monetary policy decisions - is still well within the central bank's working parameters, further reducing the likelihood of a shift in stance, he added.

HSBC chief Asean economist Joseph Incalcaterra agreed, noting that while growth is showing signs of picking up decisively, "when we dig a bit deeper, it becomes clear the economy is far from firing on all cylinders".

Still, some analysts expect the central bank to act sooner rather than later.

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