SINGAPORE: The Monetary Authority of Singapore has raised its forecast for Singapore inflation this year, prompting an adjustment to monetary policy.
It says headline CPI inflation will average 3.5 to 4.5 per cent in 2012, while core inflation is projected to average 2.5 to 3.0 per cent.
Both forecasts are a full one percentage point higher than the central bank's previous forecast ranges.
MAS also said it will increase the slope of its policy band slightly for a modest and gradual appreciation of the Singapore dollar.
Most economists had forecast no change in monetary policy.
While experts believe the central bank had come to this decision in the light of Singapore's stronger-than-expected GDP growth in the first quarter, they are concerned that a stronger Singapore dollar could adversely affect Singapore's open economy.
"In real terms, the Singapore dollar is rising more rapidly so that means competitiveness is being lost at a fairly significant pace ... which has important implications for Singapore's competitiveness," Credit Suisse director of non-Japan Asia economics Robert Prior-Wandesforde said.
"I think the impact will be felt most on the manufacturing side of the economy, or areas where perhaps Singapore doesn't have a niche advantage relative to other countries."
MAS, which uses the exchange rate as a tool to control inflation, explained that its new policy stance will help anchor inflation expectations, ensure medium term price stability and help keep growth on a sustainable path.
With economic activity turning out somewhat stronger than anticipated in the first quarter of 2012 and "resource markets" tightening further, MAS says core inflationary pressures have persisted.
MAS Core Inflation, which excludes private road transport and accommodation costs, rose from 2.4 per cent in Q4 2011 to 3.2 per cent in the first two months of 2012.
CPI All-Items inflation moderated from 5.5 per cent in Q4 2011 to 4.7 per cent in January to February.
MAS says inflation rates will remain elevated over the next few months, before easing over the remainder of this year.
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