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Singapore's central bank will probably ease monetary policy in October to support the country's slowing economy, which may slump into a technical recession in the third quarter, Citigroup said on Monday. Citi economist Kit Wei Zheng said the Monetary Authority of Singapore will probably slow the rise of the Singapore dollar by switching to a "zero appreciation" bias, and reducing the slope of the policy band in which the currency is allowed to rise.
The central bank sets monetary policy by managing the Singapore dollar in a secret trade-weighted band against a basket of currencies, not by adjusting interest rates. It tightened policy at its last two meetings to tame inflation, which hit a 26-year high of 7.5 percent before cooling in July. Under that opaque system, the currency is still allowed to appreciate at a gradual pace against the trade-weighted basket, although no one is sure at what pace.
"The backdrop of an extended period of below potential growth is essentially disinflationary, and sets the stage for an easing of monetary policy," Kit said in a note to clients.
He said there was a 40 percent chance Singapore may fall into a technical recession in the third quarter. Like others around the world, Singapore's trade-dependent economy is slowing as the global credit crisis takes a toll on consumer demand, especially in the key US and European export markets. Kit said non-oil domestic exports, which were worth about three quarters of Singapore's economy in 2007, could fall "well into early 2009", citing the OECD Composite Leading Indicator.

Copyright Reuters, 2008

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