Shoppers walk through the Bugis Junction shopping mall in Singapore last month. Singapore’s inflation rate last month rose to the highest level since December 2008, putting pressure on the central bank to dampen price gains by allowing greater currency appreciation. Image Credit: Bloomberg

Singapore: Singapore raised its inflation and export forecasts for 2011 after the economy expanded at a record pace last year, sustaining pressure on the central bank to allow greater currency appreciation.

Consumer prices may climb as much as four per cent this year while exports may rise 10 per cent, the trade ministry said yesterday.

The economy expanded a revised 14.5 per cent in 2010, with gross domestic product growing an annualised 3.9 per cent in the three months to December 31 from the previous quarter, it said.

Singapore may tighten monetary policy further even as the government forecasts growth will slow in 2011 to less than half of last year's pace.

The island's currency is the second-best performer in Asia excluding Japan in the past year, gaining about 10 per cent as an economic rebound from the 2009 global recession boosted wages and spurred tourist arrivals to unprecedented levels.

Tightening

"The economy has recovered so strongly and is operating by almost everyone's estimates at above potential and warrants a tightening," said Yougesh Khatri, a senior economist at Nomura Holdings in Singapore. "The higher inflation forecast supports our view that they will tighten further." The Monetary Authority of Singapore, which uses the exchange rate as its main tool to manage inflation, revalued the currency in April 2010 and said in October it would steepen and widen the currency's trading band while continuing to seek a "modest and gradual appreciation." The next scheduled for review is in April.

The Singapore dollar added 0.1 per cent to 1.2777 Singapore dollars (Dh3.67) versus its US counterpart at 11.48am yesterday. The Straits Time Index of stocks fell 0.2 per cent. Consumer prices may climb three per cent to four per cent this year, up from a previous forecast of two per cent to three per cent, the trade ministry said in a statement yesterday. Price gains may reach five per cent to six per cent in the first few months of 2011, it said.

"Thereafter, inflation should moderate, especially in the second half of the year," it said. Inflation accelerated to 4.6 per cent in December, the fastest pace in two years.

The government kept this year's economic growth forecast at 4 per cent to 6 per cent, even as there is "some upside potential" to the target, the ministry said. The fourth-quarter growth rate was revised from a January 3 estimate of 6.9 per cent. "The key macroeconomic challenge this year will not be growth but dealing with emerging cost pressures," said Ravi Menon, trade ministry permanent secretary.