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Singapore is identifying inflation as the major policy headache of 2011, but it’s also careful not to attract speculators who might see a ripe opportunity to drive up the Singaporean dollar.
The country raised its 201 inflation forecast Thursday from 2% - 3% to 3% – 4%, compared to 2.8% in 2010. The Ministry of Trade and Industry also said that inflation could hit 5% - 6% in the first few months of the year before moderating later.
Analysts expect the Monetary Authority of Singapore to revise its exchange rate upwards in its next policy move in April.
“Further tightening of macroeconomic policies is needed, with the upcoming budget and a spring monetary policy meeting providing good opportunities to act as needed,” wrote HSBC in a note.
Goldman Sachs also said they believe there is a “high probability” that the MAS would tighten its policy stance further in April.
As Singapore uses its exchange rate as the main policy tool to maintain price stability, the MAS is likely to play down the possibility of monetary tightening to fend off speculation of its currency.
“MAS’ assessment of underlying price and cost pressures is largely the same as that in the previous policy review which took into account price increases alongside the strong rebound and continued growth in the economy,” said MAS Deputy Managing Director Ong Chong Tee. “At this stage, there is no need to revise the monetary policy that was announced on Oct.14” because of the lag in monetary policy, he added.
The Singapore dollar was almost unchanged on Thursday from Wednesday’s rate of S$1.2792 against the U.S. dollar.