Singapore’s central bank unexpectedly signaled it will allow faster appreciation in the island’s currency to curb inflation even as slowing global growth caused its economy to shrink last quarter.

The Monetary Authority of Singapore said today it will steepen and widen the trading band on the local dollar while continuing to seek a “modest and gradual appreciation.” Gross domestic product shrank at a 19.8% annual rate in the third quarter from the previous three months after climbing a revised 27.3% in the April-to-June period, the trade ministry said in a separate report.

 

“The implication is that Singapore is less worried about growth and more worried about upside risks to inflation,” said Robert Prior-Wandesforde, head of Southeast Asian economics at Credit Suisse Group AG in Singapore.

 

Singapore’s move contrasts with Asian nations from Thailand to Japan, which have taken steps in the past month to cool the appreciation in their currencies that is threatening exports at a time when global growth is slowing. Prime Minister Lee Hsien Loong has said Singapore’s economy may “moderate” in the coming months after a record first-half expansion, citing risks from Europe and the U.S.

 

“Singapore is typically a bellwether for the region’s export outlook and it is the first to show cracks as global growth slows,” Alvin Liew, an economist at Standard Chartered Plc in Singapore, said before the report. Threats to Asian growth include “the fading impact of stimulus packages, stubbornly high unemployment rates and austerity measures that are likely to crimp consumption in the West,” he said.

 

The island’s currency rose 0.9% to $1.2917 per U.S. dollar as of 8:21 a.m. local time. It has gained 8.5% this year, making it the third-best performing currency in Asia excluding Japan.

 

The Monetary Authority of Singapore uses the currency rather than a benchmark interest rate as its main tool to manage inflation. All but one of 14 economists in a Bloomberg survey had expected the central bank to forgo a more aggressive strengthening in the Singapore dollar, a decision that may have helped support overseas sales by manufacturers including Hi-P International.

 

At its April monetary policy review, the authority said it would shift the Singapore dollar to a stronger range to trade in.

 

Its move today is “effectively a form of monetary tightening and reflects concerns about domestic inflation, especially the labor market as even though the economy is expected to slow, they are not expecting a double-dip recession,” said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc.

 

The steeper slope will allow a faster pace of appreciation while the wider band will address the increased volatility in the market, he said.

Singapore’s inflation accelerated to an 18-month high of 3.3% in August. The central bank forecasts price gains may quicken to about 4% by the end of 2010 and “stay high” in the first half of 2011, it said today.

 

Singapore’s economy grew 10.3% in the third quarter from a year earlier, compared with a revised 19.6% expansion in the previous three months, the government said. The median forecast in a Bloomberg News survey of 24 economists was for a 10.8% gain.

 

GDP shrank last quarter from the previous three months after climbing a revised 27.3% in the April-to-June period. The median forecast of 19 economists surveyed by Bloomberg News was for a 15.7% contraction.

 

Japan has intervened in the past month to ease gains in the yen and China has restrained the yuan’s advance amid rising capital inflows into emerging and Asian economies, which are expanding faster than developed nations.

 

Manufacturing, which accounts for about a quarter of Singapore’s economy, climbed 12.1% from a year earlier in the three months through September, after surging a revised 46.1% in the second quarter.

 

The construction industry gained 6.7%, while services grew 10.2%. The city’s two casino resorts run by Genting Singapore Plc and Las Vegas Sands Corp. have attracted millions to its gaming centers, while employment growth is boosting spending at malls and restaurants.

 

“Tourism-related sectors have been well supported by record tourist arrivals and the financial-services sector has performed well thanks to growth in private banking and sustained strong business interest in Asia,” Liew said. “Both should continue to do well.”

 

The government in August announced measures to cool the property market, including increasing down payments for second mortgages and imposing a stamp duty on property held for less than three years to curb speculation.

 

“Financial services are benefitting from the lagged impact of property transactions on mortgage growth, but this should slow in 2011,” Citigroup’s Kit said before the report.

 

The government reiterated its prediction for GDP to rise 13% to 15% in 2010. That pace would put Singapore in the running to be the world’s fastest-growing nation in 2010.