Singapore, which had a record first- half expansion, said economic activity will probably remain at “high levels” for the rest of the year, adding pressure on business costs and spurring inflation.

Growth is supported by a broad range of industries that will remain “largely intact” in 2010, the Monetary Authority of Singapore said in its annual report today. While inflation is forecast to pick up toward the latter part of the year, “at this stage, we assess that the current monetary policy stance of a modest and gradual appreciation of the” currency policy band remains appropriate, Managing Director Heng Swee Keat said.

 

Singapore’s economy is in contention to be the world’s fastest-growing in 2010 as rising demand for goods and services prompted the government to raise growth forecasts three times this year and led the central bank to revalue its currency. The outlook is clouded by European governments’ austerity programs to cut budget deficits and a cooling in household spending in some of the world’s largest economies.

 

“For Singapore, the underlying support for growth for the rest of 2010 is expected to remain largely intact and economic activity is likely to be sustained at high levels,” the central bank said in the report. “However, if the crisis in Europe worsens, financial contagion spreads and the functioning of the international credit markets becomes impaired, downside risks to global growth could intensify.”

 

Singapore’s central bank, also known as the MAS, has for three decades used the currency, rather than a benchmark interest rate, as its main tool for managing inflation. At its April monetary policy review, the central bank said it would shift the Singapore dollar to a stronger range to trade in and allow a gradual appreciation.

 

“This adjustment to the monetary policy stance will contribute to medium-term price stability in the economy,” the central bank said today. It predicts inflation will probably average between 2.5% and 3.5% this year.

 

Singapore’s inflation is likely to accelerate and policy makers should stay vigilant on the outlook for growth and prices, which may require the “further calibration” of monetary policy, the International Monetary Fund said July 23. In its annual assessment of the country’s economy, the IMF said the Singapore dollar appears “somewhat weaker” than its medium-term equilibrium level.

 

The currency rose as much as 1.2% versus its U.S. counterpart on April 14, the day the most recent monetary policy review was released. It was little changed at $1.3653 as of 11:26 a.m. in Singapore today.