SINGAPORE'S August inflation cooled further from a 26-year peak as food and transport costs eased, giving the central bank more room to loosen monetary policy as the economy slows.

Annual inflation stood at 6.4 per cent in August, slightly higher than an expected 6.2 per cent, but down from a 26-year high of 7.5 per cent earlier in the year.

Given that inflation has probably peaked, some economists said the central bank may ease monetary policy in October by letting the Singapore dollar rise at a slower pace.

But they said the decision would be tricky because it is unclear how much the global economy would slow on the back of the financial crisis.

'It is definitely going to be a close call. It could be between ease or hold, probably a dovish tone,' said Mr Matthew Hildebrandt, an economist at JPMorgan.

From the previous month, the consumer price index rose 0.1 per cent after seasonal adjustments, the Department of Statistics said in a statement on Tuesday.

Economists had forecast a decline of 0.1 per cent.

After months of rising prices, inflation across Asia is expected to have peaked as economies slow on the back of weakening export sales to the key US and Europe markets.

Hong Kong's consumer price index fell to 4.6 per cent in August, its lowest level since March, while inflation in India eased for the third week running at the end of August, and a top policy adviser said it may have peaked.

Recession ahead?
Singapore's central bank, the Monetary Authority of Singapore, sets policy by managing the Singapore dollar in a trading band against a basket of currencies, not by setting interest rates.

It tightened monetary policy at its previous two meetings to tame inflation.

Singapore's trade-dependent economy looks increasingly likely to fall into a recession - commonly defined as two consecutive quarters of economic contraction - in the third quarter due to a slump in electronics and drugs exports.

Singapore's Trade Minister Lim Hng Kiang was on Tuesday quoted as saying the economy may grow slower than the government's 4-5 per cent forecast this year as the global credit crisis hurts demand for exports.

Mr David Cohen, an economist at Action Economics, said the outlook was clouded by uncertainty because of the mayhem in the financial world.

'I suspect that the MAS will be happy to remain patient and will just continue with the policy of gradual appreciation in the Singapore dollar.'

The International Monetary Fund said in August in its annual evaluation of Singapore's economy that containing inflation pressures should be a priority for the country.

But IMF board directors appeared divided over whether Singapore should further tighten policy, and noted the Singapore dollar 'remains weaker than the level implied by long-term fundamentals.'