Singapore seen sticking with tight monetary policy as economy shows resilience

Singapore's central bank is expected to stick with a tight monetary policy stance to guard against inflationary pressures, while the economy probably maintained a solid pace of year-on-year growth in the first quarter. -- ST FILE PHOTO: KEVIN LIM&nbs
Singapore's central bank is expected to stick with a tight monetary policy stance to guard against inflationary pressures, while the economy probably maintained a solid pace of year-on-year growth in the first quarter. -- ST FILE PHOTO: KEVIN LIM 

SINGAPORE (Reuters) - Singapore's central bank is expected to stick with a tight monetary policy stance to guard against inflationary pressures, while the economy probably maintained a solid pace of year-on-year growth in the first quarter.

Forecasts from 12 analysts showed that they all expect the Monetary Authority of Singapore (MAS) to keep unchanged its stance of allowing a "modest and gradual" appreciation of the Singapore dollar.

Economists expect the MAS to stay vigilant against potential inflationary pressures stemming from a tight labour market, which is partly a result of the government's efforts to boost productivity and reduce reliance on foreign labour.

"The risk to the economy in Singapore is more inflation than growth. I think that's what will keep the MAS on hold," said Tim Condon, head of research Asia for ING.

"It's more the threat that growth is quite good, the labour market is very tight and the productivity enhancing measures that the government put in place and is continuing to put in place are pushing up business costs," he added.

Singapore manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.

The private forecasters covered by the survey all said they expect the MAS to make no changes to the slope, width and midpoint of the Singapore dollar's trading band.

"The MAS is aware that the labour market is extremely tight and it will get tighter because of how much harder it is for firms to bring in foreign workers now," said Daniel Martin, Asia economist for Capital Economics.

No exact date has been announced yet for the MAS policy decision and the advance estimate for first-quarter gross domestic product, but they are both expected to be released towards mid-April.

A Reuters survey of 13 economists showed that Singapore's gross domestic product probably expanded by 5.3 per cent in the first quarter compared with a year earlier, down slightly from 5.5 per cent growth in the fourth quarter of 2013.

On a quarter-on-quarter, seasonally adjusted and annualised basis, the city-state's GDP was seen likely to have eked out growth of 0.2 per cent in the first quarter, down from a 6.1 per cent expansion in the fourth quarter.

"The outlook I think is actually OK for Singapore. It's not great, but it's OK," said Matt Hildebrandt, an economist for J.P.Morgan.

An expected pick-up in US and European growth should offset negative factors such as a slowdown in China and give a boost to Singapore's economy this year, he said.

Economists expect inflation to edge higher in coming months, after headline consumer inflation fell to a four-year low in February of 0.4 per cent year-on-year.

The recent fall in inflation owes a lot to negative base effects stemming from swings in the prices of car permits since early 2013, and headline inflation is expected to bounce back in coming months as that impact wears off.

"I actually think we're at the trough of at least year-on-year inflation right now," said Credit Suisse economist Michael Wan, adding that inflation is likely to rise to levels around 3 per cent in the next few months.

In addition, the MAS measure of core inflation, which excludes changes in the prices of cars and accommodation, is expected to head higher on the back of potential wage cost pressures.

A recent survey conducted by MAS showed that economists expect core inflation to reach 2.4 per cent year-on-year for the whole of 2014. In February, core inflation stood at 1.6 per cent year-on-year.

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