Singapore Central Bank Bills to Soak Up Inflows, Analysts Say

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Singapore Central Bank Bills to Soak Up Inflows, Analysts Say

July 29, 2010, 11:54 PM EDT

By Patricia Lui
July 30 (Bloomberg) -- Singapore’s planned issuance of central bank bills will help limit money-supply growth as investors channel more funds into the world’s fastest-growing economy, say Standard Chartered Plc and Barclays Plc.
The Monetary Authority of Singapore, or MAS, yesterday announced that it will issue negotiable central bank bills with maturities of up to three months from the second quarter of 2011. The government predicts gross domestic product will increase as much as 15 percent this year and the MAS in April unexpectedly revalued the Singapore dollar to help contain inflation.
“The bills will help maintain money-market stability as there have been a lot of capital inflows, which are very likely to continue,” said Edward Lee, regional head of interest-rates strategy at Standard Chartered in Singapore. “It will also help sterilize liquidity during currency intervention. They do not want rates to be too low, given the economic growth.”
Singapore’s central bank uses the currency rather than interest rates to conduct monetary policy. In April, it made an unprecedented one-off revaluation against the trade-weighted basket of currencies that the Singapore dollar is managed against and said it would target further appreciation.
The Singapore dollar traded at S$1.3624 versus the greenback as of 11:06 a.m. local time, 2.4 percent stronger than at the start of the month, according to data compiled by Bloomberg. It reached a two-year high of S$1.3593 on July 27.
Growth, Inflation
Gross domestic product expanded 18.1 percent in the first half, the fastest pace since records began in 1975. Consumer prices rose 2.7 percent in June after increases of 3.2 percent in both April and May that were the biggest in 14 months. The central bank aims to keep inflation between 2.5 percent and 3.5 percent this year.
Inflation is likely to accelerate and policy makers should stay vigilant on the outlook for growth and prices, which may require “further cbration” of monetary policy, the International Monetary Fund said on July 23.
Singapore’s domestic interbank overnight rate was 0.19 percent yesterday, according to the Monetary Authority of Singapore. The rate has averaged 0.09 percent this year, down from 0.16 percent in 2009, 0.56 percent in 2008 and 2.17 percent in 2007. It reached 0.01 percent on July 16 for the seventh time this year.
“Liquidity is very ample and the overnight rate is still close to zero, lower than even before the global crisis,” said Wai Ho Leong, a regional economist at Barclays Plc in Singapore. “There’s a lot of offshore money buying stocks, bonds and property and there’s also foreign direct investment. The central bank bills are a more cbrated way to manage liquidity.”
Appreciation Bets
Bank Indonesia last month tightened rules governing foreign ownership of its bills in a bid to curb speculative inflows, requiring overseas investors who buy the securities to hold them for at least one month. Indonesia’s benchmark interest rate is 6.50 percent, compared with a maximum 1 percent in the U.S., euro area and Japan.
“It’s slightly different from Indonesia’s case,” Barclays’ Leong said. “If you buy bills in Singapore, it is because you are sitting out for currency appreciation. Yields are quite low and it’s quite painful to be doing this.”
Currently, Singapore uses foreign-exchange swaps, borrowings and repos in its money-market operations. The MAS bills will be negotiable, so banks needing liquidity can sell them or pledge them as collateral in interbank repo markets as well as the MAS Standing Facility, the central bank’s managing director Heng Swee Keat said yesterday. Up to S$20 billion ($14.7 billion) of the bills are planned initially, Heng added.
--Editors: James Regan, Ven Ram

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