Singapore will seek faster currency appreciation to curb accelerating inflation even as growth in the local economy slows, the central bank said today in its semi-annual exchange-rate review.

The Monetary Authority of Singapore will steepen and widen the band in which the republic’s dollar trades against a weighted basket of currencies, keeping the midpoint unchanged, it said in a statement. The currency climbed to the strongest level versus its U.S. counterpart since 1981 after the surprise announcement that was forecast by only one of 14 economists surveyed by Bloomberg.

 

“This is effectively monetary tightening and reflects concerns about domestic inflation,” said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. “The steeper slope will allow a faster pace of appreciation. The wider band will deal with the increased volatility in the market.”

 

Singapore’s dollar climbed 0.7% to $1.2941 versus the greenback as of 10:56 a.m. local time, according to data compiled by Bloomberg. It earlier rose as much as 1% to $1.2893, the strongest level since 1981 when Bloomberg began compiling the data. The currency has gained 8.3% this year, the third-best performance among the 10 most-traded Asian currencies excluding the yen.

 

The central bank uses the currency rather than a benchmark interest rate to manage inflation, guiding the local dollar within a band of undisclosed trade-weighted currencies and adjusting the pace of appreciation or depreciation by changing the band’s slope, centre or width.

 

In a surprise move in April, the MAS embarked on an unprecedented tightening by shifting to a stronger range for currency fluctuations and seeking further appreciation thereafter, the first such combined move in its 39-year history.

 

Gross domestic product shrank an annualized 19.8% in the third quarter from the previous three months, the trade ministry said separately today. The economy expanded 10.3% in the third quarter from a year earlier. Inflation will accelerate to 4% by the end of the year, the MAS said. That compared with 3.3% in August.

 

“Singapore’s economy will continue to expand, although at a slower and more sustainable pace after recovering robustly from the downturn,” the MAS said. “For 2010 as a whole, GDP is on track to grow by 13% to 15%.”

 

“The main message is that it is a hawkish stance but they are also giving themselves maximum flexibility to adjust their policy in response to external developments in between official policy reviews,” said Pieter Van Der Schaft, head of Asian rates research at Morgan Stanley in Hong Kong, the only bank surveyed by Bloomberg that forecast the tightening. “Growth is very strong now but going into 2011, global growth could decelerate and the next policy announcement is six months away.”

 

Singapore’s dollar will rise to $1.24 against the greenback by the middle of 2011, Van Der Schaft predicted. That compares with a median estimate of $1.28 in the Bloomberg News survey conducted last week.