Singapore cbank dollar buying to depress money rates
By Kevin Yao
SINGAPORE, July 15 (Reuters) - Singapore's depressed money market rates will stay that way for a while as the central bank continues to buy dollars to limit currency appreciation, flooding the market with money, analysts said on Tuesday.
Three-month interbank market rates (SIBOR)
Six-month interbank rates fell to 1.50 percent on Monday from from 1.813 percent in early June.
Singapore's interbank rates have been falling steadily from the middle of 2006, when the three-month rate peaked at about 3.6 percent, coinciding with steep gains in the local dollar since then.
Analysts expect the short-term rates to stay weak in the coming months as foreign money flows in, putting pressure on the Singapore dollar to rise and forcing the Monetary Authority of Singapore (MAS) to buy U.S. dollars to curb its strength.
"The easier money rates have been an 'anomaly' that are probably partly attributable to continued inflows that are keeping interbank liquidity flush," said Emmanuel Ng, a currency strategist at OCBC Bank in Singapore.
"There is little impetus (for the rates) to rise significantly in the near term unless we see a generalised withdrawal of investor flows out of Asia en masse," he added.
But Chia Woon Khien, an analyst at Royal Bank of Scotland, said she believed that Singapore's money rates would bottom out later this year as weakening exports reduce the amount of U.S. dollar inflows and ease upward pressures on the currency.
"Considering that liquidity conditions are still flush, money market rates have fallen quite a lot lately, but I'm not so sure if rates have more room to fall," she said.
The MAS, which is torn between the dilemma of containing inflation running at 26-year highs while trying to avoid a sharp economic slowdown, is expected to stick to its tight policy at its review in October but refrain from tightening further.
The central bank, which conducts monetary policy by managing the currency within a secret trading band against a basket of currencies instead of setting interest rates, shifted the centre of that band upwards in April to try to quell inflation.
CURRENCY RISES
Analysts say this unique policy constrains the central bank because it has to intervene to control the currency, and in the process it has no sway over rates in the money market.
Han Sia Yeo, a currency strategist at Bank of America, said he expected the Singapore dollar to stay close to the estimated upper end of the band in the near term, but gradually drift lower towards its mid-point later this year as inflation risks begin to recede.
The Singapore dollar
The Singapore dollar has gained 6.6 percent this year despite frequent dollar-buying intervention by the authorities, trailing behind the Chinese yuan
By contrast, fears of inflation and credit woes have hit most Asian currencies this year, particularly the South Korean won
Meanwhile, Singapore's bond yield curve <0#sgbmk=> is flattening with yields on two-year bonds rising 25 basis points in the past week and the spread between 2- and 20-year bonds narrowing to 270 basis points from 305 basis points a week ago.
Analysts said the flattening yield curve was partially influenced by recent data which showed that the economy shrank by an annualised and seasonally adjusted 6.6 percent in the second quarter -- the sharpest contraction in five years.
Citigroup has cut its forecast for Singapore's 2008 economic growth to 4.1 percent from 4.7 percent, citing slowing exports amid the U.S. slowdown, analyst Kit Wei Zheng said in a note.
"Given the growth slowdown, moderating inflation and lagged effects of past policy tightening, we expect the MAS to maintain its current policy stance in October," he said. (Editing by Jacqueline Wong)
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