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Singapore central bank first tightening in 6 years comes with trade warning

Reuters  |  SINGAPORE 

By and Aravindan

(Reuters) - tightened monetary policy for the first time in six years on Friday, saying the city-state's economy is expected to continue growing steadily even as it acknowledged risks from a trade spat between the and

The Monetary Authority of (MAS) said it would slightly increase the slope of the dollar's policy band from zero percent previously, while keeping the width and mid-point of the band unchanged.

"The measured adjustment to the policy stance takes into account the uncertainty in macroeconomic outcomes presented by ongoing trade tensions," the central said.

The policy tightening was in line with expectations, and came as official data showed the city-state's economy expanded 4.3 percent in the first quarter from a year earlier, matching market expectations and the fastest pace since a near four-year high of 5.5 percent in the third quarter of last year.

The return of global growth in recent years has prompted some Asian central banks to follow in the footsteps of the in gradually shifting away from extremely accommodative monetary settings.

They include Malaysia's central bank, which tightened policy in January and the of Korea, which raised interest rates in November.

The MAS's tightening takes it away from a "neutral" stance adopted two years ago, a setting it has resorted to in the past when the global economy deteriorated, including an 18-month period from October 2008 during the global financial crisis.

The Singapore dollar briefly rose by as much as 0.3 percent after the policy decision, but quickly pared its gains. It was last steady on the day at S$1.3119 per U.S. dollar.

With the U.S.-trade dispute posing risks to Singapore's trade-reliant economy, analysts were sceptical the MAS would tighten again at its next decision in October. One even said the latest tightening could be reversed going forward if risks materialise.

"I don't think there will be a further tightening in October... As of now, they are being cautious and not overly wanting the Singapore dollar to appreciate," said Francis Tan, an for

The central bank added that Singapore's economy should continue on a steady expansion path in 2018, but also pointed to potential risks from a U.S.-trade rift.

"An escalation of the U.S.-China trade dispute remains possible, and if it occurs, will have significant consequences for global trade," the MAS said.

The world's two largest economies have threatened each other with tens of billions of dollars' worth of tariffs in recent weeks, spurring worries of a full-scale trade war that could damage global growth and roil markets.

Although the MAS did not give a specific figure, analysts said the Singapore dollar's policy band was probably increased to a modest annual appreciation rate of 0.5 percent.

"We were surprised the MAS would tighten so soon given what is going on in the world," said Sue Trinh, for in Hong Kong.

"If the trade war turns nasty, the MAS may find itself quickly reversing its modest tightening stance," Trinh said.

The MAS said Singapore's 2018 GDP growth should come in slightly above the middle of the official forecast range of 1.5-3.5 percent.

Core inflation should come in within the upper half of the MAS forecast range of 1-2 percent in 2018, while headline all-items inflation is projected to be in the upper half of the 0-1 percent range for the whole of 2018, the central bank added.

The MAS manages monetary policy through exchange rate settings, rather than interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners within in an undisclosed policy band.

Twelve of 19 analysts in a survey had predicted the MAS would tighten monetary policy this month, with the remaining seven expecting policy to be kept unchanged.

(Reporting by and Aravindan; Additional reporting by Anshuman Daga, and Dewey Sim; Editing by Sam Holmes)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Fri, April 13 2018. 10:03 IST