More central banks may need to follow S'pore monetary move

KUALA LUMPUR: More central banks are expected to follow the Monetary Authority of Singapore's (MAS) move to tighten its monetary policy last week.

Singapore is the first in the region to do so.

HSBC Bank's regional economist Frederic Neumann said the surprise move by the Singapore authorities to narrow the exchange rate band against which the currency trades signals that Asia cannot ignore lingering price pressures either.

"With the region's trade-off between inflation and growth deteriorating, policymakers especially in Asia's smaller economies may need to tighten policy again sooner than global headlines at the moment suggest," he said in a report from Hong Kong yesterday.

Across Asia, price pressures bubble away beneath the surface and an uptick in growth could lead them to break through earlier than most currently expect.

"Singapore, in short, provides a guide to what awaits Asia. A solid quarter of growth and price worries move back in focus ... this is not to downplay the evident risks that still cast a shadow over the global economy."

Other central banks in Asia may need to follow, he added.

Bank Negara Malaysia, often described as a laggard by economists for its monetary policy action compared to other central banks, has kept the Overnight Policy Rate steady at 3.00 per cent.

Singapore's economy expanded 9.9 per cent quarter-on-quarter in the first three months of 2012.

Neaumann described it as a hefty number by economy standards, saying the policy move warrants attention.

"First, the economy is highly open to trade and capital flows, and thus picks up global trends faster than others," he said, adding that the structure of the economy also closely reflects the region more broadly.

As a manufacturer, it is in a similar league to South Korea, Taiwan, and Thailand, while casinos and the city's vast malls are a sensitive gauge for consumer spending appetite in Malaysia, Indonesia and beyond.

The MAS, he said, is among Asia's most forward-looking central banks.

Monetary policy decisions are traditionally taken only twice a year, which forces officials to think a long way ahead although its policy approach uses the exchange rate instead of interest rates to control monetary conditions.

"The trouble plaguing Singapore most at the moment, sticky inflation, is something others may come to grapple with in the not-too-distant future."

Meanwhile, Standard Chartered Bank said the decision to tighten is a clear signal that the central bank thinks that inflation may be more persistent than expected.

"But at the same time, they are noting that inflation will ease in the second half and growth remains modest, thereby suggesting that they see the new changes as sufficient for now."

Over the coming months, the Singapore dollar is expected to strengthen further.