Singapore’s war on deflation hobbled by bubble

April 14, 2015

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The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Singapore’s central bank has good reasons to delay easing monetary policy, even though doing so appears squeamish for a small economy battling weak global demand and low prices.

The Monetary Authority of Singapore left its policy of “modest and gradual” appreciation of the local currency unchanged in its policy review on April 14. A majority of analysts surveyed by Reuters had expected further easing. The MAS had raised their hopes in January with its unexpected decision to reduce the pace of the local dollar’s appreciation against a basket of other currencies.

A weaker Singapore dollar should boost the cost of imported goods and help arrest a slide in domestic inflation. It could also help the city-state’s exporters regain some of their lost competitiveness. The latest data show Singapore’s manufacturing industry shrank by 3.4 percent between January and March compared with a year earlier.

But the flip side of a weaker currency is the prospect of a sudden spike in domestic interest rates. The benchmark 3-month interbank rate has more than doubled in the past eight months to slightly above 1 percent. If the U.S. Federal Reserve raises its target for short-term U.S. rates, investors might demand even greater compensation to hold a falling Singapore currency. Mortgage rates in the city, still ridiculously cheap at below 2 percent, might shoot up.

That could be problematic. The era of global easy money since the onset of the 2008 financial crisis has led to a doubling of outstanding bank loans. The multiyear credit boom has pumped up Singapore’s real estate. After rising 62 percent in four years, home prices have eased 6 percent over the past 18 months – helped by the government’s strenuous attempts to contain the mania. While gently easing prices would allow the property market to rediscover its balance, a collapse could hurt both borrowers and lenders.

Singapore’s war against stalling consumer prices and anaemic global demand would benefit from a cheaper currency. But those gains may not be enough to justify pricking a credit-fuelled property bubble. If air escapes too quickly, the damage could be far greater.

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