Singapore's central bank should "remain vigilant" to signs of deflation in the country and make policy adjustments if needed, the International Monetary Fund (IMF) said.
In a statement released yesterday, after a visit here, fund representatives noted that Singapore's growth prospects remain subdued, given a lacklustre global outlook.
The IMF also said the Monetary Authority of Singapore's (MAS) latest move to stop the local currency from rising further against a basket of key currencies was "appropriate", given slowing growth, a weakening labour market as well as low oil prices worldwide.
IMF representatives were in town from April 28 until yesterday.
The fund noted that Singapore's economic growth has slowed markedly in recent years owing to both domestic and external factors.
At home, growth is constrained by an ageing labour force, tighter limits on foreign workers and the transition costs of the shift to an innovation-based growth model.
On the external front, the outlook for global growth and trade remains subdued, the IMF said.
The fund also said Singapore's growth is likely to slow further this year, as the full impact of the slowdown in global trade and capital outflows is felt and companies continue to hold back on hiring and investment.
The most important short-term external risk is a sharper-than- expected global slowdown, which could result from weak growth in China, other emerging economies as well as key advanced economies.
The IMF expects Singapore's economy to grow 1.8 per cent this year, improving to about 2.5 per cent next year.
Still, the Singapore Government has enough in its coffers to ramp up spending and provide a short-term lift if the economic outlook worsens further, said the IMF.
"The authorities are prepared to implement fiscal stimulus through targeted measures, for example providing more income transfers to poor families and seniors and accelerating infrastructure spending," added the fund in its statement.
In the longer run, raising productivity will be essential to Singapore's growth, given slower labour force expansion, the IMF said.