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.
- CNA/wm
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I agree with ST Forumer Yeo Chee Kean comments (see below)
ReplyDeleteLIKE Hong Kong, Singapore has been battling high inflation and rising real estate prices with limited success ('Singdollar tipped to rise further'; Thursday).
The Hong Kong Monetary Authority does not have an easy job as it has very few policy tools available, as the territory's currency and interest rates are pegged to those of the United States.
While Singapore does not have such impediments, we have chosen to use only exchange rates, and not interest rates, as policy tools. This has worked well for Singapore in the past when inflation was mostly import-driven.
However, over the last 10 years, with the increase in population, both permanent and transient, inflation is becoming more of a result of a mismatch in domestic supply and demand. This is better addressed with managing interest rates than exchange rates.
Real estate sales are still hitting new highs, especially in mass-market projects, because of the low interest rates arising partly from the abundance of liquidity flowing from the West.
When the US economy finally recovers and interest rates start to move up, many Singaporeans may be caught off guard with higher mortgage payments that they may not be able to afford.
Yeo Chee Kean