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December 24, 2008

Singapore likely to let currency weaken as economy sags
Singapore's central bank is likely to flood the local money market with liquidity in the coming months as it prepares to let its currency weaken to head off a sharper economic slowdown, Reuters quoted analysts as saying Tuesday.

The Monetary Authority of Singapore, the central bank, has in recent months injected cash into the local money market to stem the rise in short-term rates to help ease credit strains, which could otherwise hit local firms and individuals, they said.

"Local money market has been flooded with Singapore dollar funds," said a trader in Singapore.

"Everyone wants to keep Singapore dollar cash in the money market to protect their balance sheets," added the trader.

One-month interbank market rates (SIBOR) fell to about 0.7 percent this week from 2.275 percent in September, when the failure of Lehman Brothers pushed up funding costs.

Three-month money rates have fallen below 1 percent from 2.225 percent in September, while one-year rates have fallen to 1.27 percent from 1.875 percent in September.

"The growth prospects are quite poor," said Selena Ling, head of treasury research and strategy at OCBC Bank in Singapore.

"They have injected funds to try to bring interbank rates slightly normal, if not down to more accommodative levels," she added.

Unlike most of its peers, Singapore's monetary authority calibrates its policy by guiding the exchange rate, rather than by setting short-term interest rates.

Analysts at Barclays Capital said in a report that they expected the monetary authority, which manages the Singapore dollar within a secret trade-weighted band, to shift the band slightly downwards when it reviews policy in April.

The Singapore dollar fell slightly to 1.4538 per US dollar on Tuesday, off its 2-1/2-month high of 1.4250 hit last week.

Analysts also expect Singapore's government to unveil an expansionary fiscal policy in January, including tax relief for firms and households, to help arrest the economic slowdown.

"I think they will probably be focusing on the fiscal stimulus in the near term," Ling added.

Central banks around the world, led by the US Federal Reserve, have slashed interest rates recent weeks as major economies slip into recession amid the global financial crisis.

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