Singapore relies on managing the value of the Singapore dollar against a trade-weighted basket of currencies - instead of using interest rates - to conduct monetary policy.

The Monetary Authority of Singapore announced a year ago that it favoured a stronger currency to curb inflation.

In its latest twice-yearly review, the MAS explained Tuesday, April 12, that it still supported currency appreciation because of the risk of inflationary pressure over the medium term due to higher commodity prices, wages and service charges - in addition to the possibility of increased oil prices.

It cut its inflation forecast for 2005, estimating a rise in the consumer price index of zero to 1 per cent, compared with a previous forecast of 1 to 2 per cent, after changes in the composition of the CPI. But it said inflation could rise to 1 to 2 per cent in 2006.

The government in a preliminary estimate said on Monday first quarter gross domestic product grew a sluggish 2.4 per cent year-on-year, and fell 5.8 per cent on an annualised basis from the previous quarter, undermined by volatility in the production of pharmaceuticals.

However MAS said “underlying growth support for the Singapore economy remains intact,” predicting a modest rebound in demand for electronics, the city-state’s biggest manufacturer, in the second half of the year. It predicted that economic growth this year will likely come in at the low end of the government’s 3 to 5 per cent forecast.

The MAS said it had “intervened significantly” in the fourth quarter of 2004 and into early 2005 to prevent a sharp rise in the value of the Singapore dollar due to a weaker US dollar and strong capital inflows into the region. But the Singapore dollar has since weakened again and eased back to the middle of its undisclosed trading ban as the US dollar rebounded.

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