SINGAPORE, Oct 14 — Singapore’s central bank maintained its existing pace of currency appreciation, forgoing stimulus as inflation risks curb scope to revive a shrinking economy.

Gross domestic product fell an annualised 1 percent in the three months through September from the previous quarter, when it expanded a revised 16.9 per cent, the trade ministry said in a statement today.

The median in a Bloomberg News survey of 13 economists was for a 4 percent contraction. The central bank, which uses the island’s dollar to manage inflation, said it will maintain a modest and gradual appreciation of the currency.

Singapore has resisted monetary easing since October 2011 as a tight labour market and record homes prices fuelled inflation pressures. The International Monetary Fund has cut its global outlook for this year and next as capital outflows add to risks for emerging markets, and policy makers around the world are watching for a resolution to the US fiscal policy deadlock that’s threatening the world economy.

“The focus of the exchange rate policy is still on inflation rather than growth,” Irvin Seah, an economist at DBS Group Holdings Ltd in Singapore, said before the report. “Domestic inflationary pressure remains high. Business cost is still rising and the labour market is still tight.”

The Singapore dollar was little changed at S$1.2458 (RM3.18) against its U.S. counterpart at 8:13am local time today. The currency has weakened about 2 per cent this year.

The Monetary Authority of Singapore was predicted by 19 out of 21 analysts to keep the current stance of a “modest and gradual” appreciation in the Singapore dollar and refrain from adjusting the trading band today. At its last review in April, it stuck to the policy of allowing gradual gains in its dollar.

Appropriate stance

The economy expanded 5.1 per cent last quarter from a year earlier, after growing a revised 4.2 per cent in the previous three months. The median estimate in a Bloomberg survey was for a 3.8 per cent gain. The government forecasts economic growth of 2.5 per cent to 3.5 per cent this year.

“This policy stance is assessed to be appropriate, taking into account the balance of risks between external demand uncertainties and rising domestic inflationary pressures,” the central bank said today. “The Singapore economy should continue to expand for the rest of 2013 and into 2014, although some volatility in growth rates is likely. There are short-term uncertainties in the external environment.”

The central bank guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and centre of the band.

Cost pressures

Singapore’s inflation accelerated to a five-month high of 2 per cent in August on food and housing, after earlier easing from more than 5 per cent in mid-2012. Domestic cost pressures are expected to persist “amid continuing tightness in the labour market,” according to a central bank and trade ministry statement last month. Consumer prices are forecast to rise 2 per cent to 3 per cent this year.

“Barring a significant deterioration in global demand conditions, the labour market will remain tight, and exert further upward pressures on MAS core inflation as firms pass on accumulated costs to consumer prices,” the central bank said today.

International finance chiefs last week warned that failure by US lawmakers to resolve their debt spat would hurt the global recovery. A political stalemate has closed the US government since October 1, raising concern the standoff could end with the world’s largest economy unable to cover its bills and returning to recession.

Singapore’s central bank said last week it closely monitors all market developments including the ongoing US debt impasse and will take action if needed to safeguard the purchasing power of its reserves. The monetary authority held about US$81.5 billion (RM259.1 billion) of US Treasuries as of July.

The trade-dependent economy cut its exports outlook for this year in August as a slowdown in China hurt demand for goods. Non-oil domestic exports may be unchanged or rise 1 per cent this year, compared with a previous forecast of 2 per cent to 4 per cent, according to the trade promotion agency. — Bloomberg