Singapore central bank ups inflation view once again

Jan Dahinten & Koh Gui Qing

Singapore’s central bank on Thursday raised its 2008 inflation forecast to 6-7 percent, the third upgrade this year, and warned that price pressures will persist despite a slowdown in economic growth.

The Monetary Authority of Singapore said the latest increase in its inflation forecast, from a range of 5-6 percent previously, partly reflected high oil and food prices. But it said inflation would moderate in the second half and that the monetary policy stance announced in April remained the right one.

“While the moderation in GDP growth may be expected to take the edge off some inflationary pressures (for instance wage and rental increases), overall inflation risks are likely to remain on the upside,” it said in its annual report published on its website

The bank’s Managing Director Heng Swee Keat told journalists inflation expectations in Singapore were well anchored and that inflation was expected to moderate in the second half of the year.

“There are early signs of an easing of domestic cost pressures as the economy slows and asset markets consolidate,” Heng said, adding that rentals for commercial properties may have peaked.

“For monetary policy, our objective continues to be price stability over the medium term.”

The text of his speech is available here. The next monetary policy statement is due in October.

The central bank also reiterated its 2008 economic growth forecast of 4-6 percent, in line with the country’s medium-term potential growth rate. Last year, the economy grew 7.7 percent.

“In the coming months, activities which rely directly on G3 demand, such as electronic manufacturing, or are sentiment-driven like stockbroking, will be more adversely affected by the global headwinds,” Heng said.

“However, other industries including construction, marine and offshore engineering as well as financial intermediation services are expected to continue to provide support to GDP growth over the rest of 2008.”

Singapore’s economy suffered its biggest contraction in five years in the second quarter as exports to the United States and Europe tumbled, which analysts said may leave less room for the central bank to battle 26-year-high inflation.

But economists have said the annualised and seasonally adjusted 6.6 percent contraction — much stronger than the forecast 1 percent decline — was exaggerated by a slump in volatile drugs output, and the economy should avoid slipping into recession.

The central bank aims for medium-term price stability and steers monetary policy by managing the Singapore dollar’s nominal effective exchange rate (S$NEER) — its relative value compared with a basket of currencies — rather than by adjusting interest rates.

The trading band and the currencies in the basket are kept secret.

The MAS moved the centre of the band up in April, its most aggressive policy change since the 2003 SARS epidemic.

“Given the inherent lags in the price transmission process, the effects of the appreciation in the S$NEER will continue to moderate cost and price pressures in the periods ahead,” it said in the report.

The Asian Development Bank warned that central banks in emerging East Asia were moving too slowly to combat the threat of oil and food inflation and that timely action by policy makers was needed to maintain healthy growth — otherwise the region risked a damaging upward spiral of wages and prices.

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