Singapore inflation to stay near 26-year high

April 16, 2008
Singapore Democrats

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Singapore’s inflation will run at its highest levels in nearly three decades in the first half of the year, the country’s trade minister said on Tuesday, even after the central bank tightened monetary policy last week.

The annual rate of inflation climbed to 6.6 percent in January, the highest level since 1982, and the minister said it would hold at similar levels until June.

“Our projection is that inflation will stay fairly high at this current level, above 6.5 percent for the first half of the year. And then we expect it to go down in the second half of the year,” the minister, Lim Hng Kiang, told reporters on the sidelines of a conference.

Analysts said price pressures from rising food and raw material prices are threatening the government’s forecast of keeping inflation for the year as a whole in a range of 4.5 percent to 5.5 percent.

Reflecting the inflation threat, Singapore’s central bank last week tightened monetary policy by allowing a rise in the Singapore dollar , its main policy tool. It reviews policy again in October.

“Inflation will come in more than 5.5 percent for the year but it will peak in the first half. It reflects resilient domestic demand and commodity prices,” said Robert Prior-Wandesforde, an economist at HSBC.

“The central bank may not necessarily revert to a more neutral stance in October because the economy is performing well,” he said.

The Monetary Authority of Singapore conducts policy by steering the Singapore dollar within a secret trade-weighted band against a basket of currencies, unlike most central banks which use interest rates as their main policy tool.

Last week, the MAS said it had raised the central point of the trading band, prompting the currency to hit a record high against the U.S. dollar.

Economists said the policy move could backfire. They argue that a rising Singapore dollar will encourage capital inflows, putting more cash into the local market. That could push interest rates down and stoke inflation further.

“Overall, I think we have a wide array of levers to address the inflation problem,” Lim said. “The exchange rate, that’s our main lever. At the same time we also tackle supply constraints, whether it is office space, commercial space, industrial space, or wages through our flexibility in our labour markets.”

Economists said unexpectedly strong first-quarter growth, running at an annualised seasonally adjusted rate of 16.9 percent, had calmed fears the weakness of the U.S. economy would drag on the Singapore economy, giving the central bank room to tighten policy.

Lim predicted annual growth would come in closer to the country’s medium-term trend rate of 4-6 percent, which is also the government’s growth forecast for this year.

He suggested that Singapore’s trade, which is largely dependent on Europe and the United States, was doing well in tough times.

“Specifically, we have faced headwinds in the electronics sector — not because the volume has not gone up, in fact the volume has gone up — but the prices have come down so the value of the trade has also come down,” Lim said.

Singapore will release March trade data on Thursday.

http://sg.news.yahoo.com/rtrs/20080415/tap-singapore-economy-c3bb44c.html