Dark clouds spell policy dilemma for MAS

[Musicwhiz]

For full article please visit the website.
http://www.straitstimes.com/PrimeNews/St...22218.html

The Straits Times
Jul 14, 2012
Dark clouds spell policy dilemma for MAS
Boost to economic growth needed but inflation likely to remain high

By Aaron Low

YESTERDAY'S data was a clear sign the economy has taken an unexpected turn for the worse.

The unexpected 1.1 per cent contraction in the second quarter from the first three months of the year left some economists scrambling to downgrade their forecasts.

The sub-par economic performance now poses a potential dilemma for the central bank, which will release its semi-annual exchange rate policy statement in October.

For a while now, the Monetary Authority of Singapore has kept a clear focus on fighting inflation, which has been rising strongly over the 18 months.

Since April 2010, the MAS has allowed the currency to appreciate at a faster rate, in a series of monetary policy tightening moves.

The MAS uses the exchange rate to fight inflation, as a stronger Singdollar makes imports cheaper, helping to mitigate the rising global prices of the many goods and services that Singapore imports.

But now economists believe that the focus may need to shift from inflation to dealing with economic growth.

To some extent, this has already been done. In April's monetary policy statement, the MAS, in anticipating a slowing economy, decided to slow the pace of appreciation of the Singapore dollar.

Singapore is not alone is facing this policy dilemma. In fact, other central banks have already started to switch the focus away from inflation to boosting growth amid a global downturn.

Last week, the European Central Bank cut its key interest rate by a quarter of a percentage point to a record low in an effort to boost its sagging economy.

In Asia, China's central bank also lowered its key interest rate for the second time in a month, while South Korea's central bank also unexpectedly cut interest rates on Thursday.

Is it time for the MAS to follow suit and move more aggressively to tackle falling growth rates?

For now, most economists believe the central bank will keep its current stance come October. A big reason for this is because they do not expect inflation to fall as fast as hoped.

OCBC Bank economist Selena Ling noted that although the property market seems to be cooling off, car prices are likely to remain high. Cars and property accounted for the bulk of inflationary pressures over the past year.

But with growth slumping, an increasing number of economists are betting that the MAS could ease monetary policy.
------