SINGAPORE - Singapore's central bank is expected to keep monetary policy on hold on Friday and allow the local dollar to rise at a "modest and gradual" pace against other currencies to help combat persistent inflationary pressures.
All 16 forecasters polled by Reuters expect the Monetary Authority of Singapore (MAS) to stand pat when it issues its half-yearly policy statement, keeping the Singapore dollar on its upward path with no change to the pace of appreciation.
"With growth momentum likely to be stronger and inflation more sticky than what policymakers have previously anticipated, the MAS will most likely maintain its current policy stance,"DBS economist Irvin Seah said in a note on Monday.
He added MAS will likely hold off tightening policy further as local manufacturers are already struggling with higher labour costs and will be hard hit if the Singapore dollar is allowed to rise at a faster pace.
Singapore manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.
At its last policy announcement in October, MAS reduced the slope of the policy band, essentially slowing the pace of Singapore dollar appreciation to take into consideration the slowing economy and an easing in inflationary pressures.
MAS has since conceded that price pressures have been more persistent than expected.
Singapore's inflation rate slowed to 4.6 per cent in February from a year earlier, but remained elevated, while exports and tourism data for January and February have come in stronger than expected and manufacturing activity likely expanded for a second straight month in March.
The Singapore dollar - the world's 12th most actively traded currency - has gained around 3 per cent against the US dollar so far this year and is currently trading around 1.2605 to the greenback.
Most traders believe the Singapore dollar is currently trading at or slightly above the midpoint of the trading band.
Several economists, including DBS and Credit Suisse, predict that Singapore may have to raise its official forecast of 1-3 per cent economic growth and inflation of 2.5 per cent to 3.5 per cent for 2012.
MAS had in October also left its wider-than-normal policy band unchanged, allowing the Singapore dollar to trade in what economists believe is a range of plus or minus 3 per cent from the midpoint.
With the exception of Bank of America Merrill Lynch, which predicts MAS will narrow the trading band as currency markets are no longer as volatile, economists believe MAS will leave the band unchanged to allow itself greater flexibility in managing the Singapore dollar.
The central bank had widened the band in October 2010.
FX impact Nomura, whose base scenario is that the Singapore will stand pat on policy, said there was a 40 per cent probability that MAS could surprise the market by tightening policy this week.
It described the Singapore central bank as a "hawkish institution" that had in the past acted more aggressively to pre-empt inflationary pressures than the consensus view at that time.
The Japanese investment bank predicted there could be a"minor sell-off" in the Singapore dollar if the central bank kept policy unchanged, while the currency could rally sharply if MAS tightened policy.
"In the last three surprise tightenings in April 2010, October 2010, and April 2013, the Singapore dollar nominal effective exchange rate (NEER) rose by an average 0.6 per cent in the session after the announcement," Nomura said.