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INTRODUCTION |
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In April this year, MAS reaffirmed the
policy of a modest and gradual appreciation of the S$NEER policy band
which has been in place since April 2004. |
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This policy stance has contributed to low
and stable inflation amidst the robust economic growth over the past few
years. |
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Since the last policy review, the S$NEER has
eased from the upper end of the policy band, although in recent weeks it
has edged up following the renewed weakness of the US$. (Chart 1). |
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Despite the turbulence in global financial
markets arising from the US subprime mortgage problems, financial
markets in Singapore, in particular the money markets, have continued to
function in an orderly manner. |
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The three-month domestic interbank interest
rate fell from 3.5% at end-February to 2.5% in June. While the
disruption of US and European money markets in early August had led to a
temporary spike in the domestic three-month rate to about 3%, it has
since eased to around 2.5%. |
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OUTLOOK FOR 2007 AND 2008 |
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The Singapore economy has performed
better than expected thus far in 2007, with robust growth recorded
across most industries. |
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Notably, the non-IT industries and
asset market-related activities – that is, those associated with
the property market as well as the financial advisory and capital
markets – contributed significantly to overall GDP growth in the
first half of the year. |
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In Q3, Advance Estimates released by the
Ministry of Trade and Industry pointed to a moderation in economic
momentum, largely on account of a pullback in some asset market-related
activities. |
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Nonetheless, financial markets have
rebounded recently and underlying economic conditions remain
supportive. GDP growth is therefore on track to come in at the
upper end of the 7-8% forecast range this year, up from the
4.5-6.5% forecast during the April review. |
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Looking ahead, growth prospects of the
US economy have weakened in line with the ongoing correction in
the housing market and tighter credit conditions. Other economies
are also likely to see some softening in the near term. |
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However, the global economy is
expected to remain resilient, particularly in Asia, where domestic
demand and regional trade should continue to be firm. |
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In the Singapore economy, growth will
be led by non-IT manufacturing, construction and business
services, which have built up a strong momentum and are more
dependent on regional and domestic sources of demand as well as
developments in specific product markets. |
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At this stage, our assessment is that
the Singapore economy is likely to expand at a slower rate in 2008
than in the recent past, reflecting weaker global economic growth.
Singapore’s GDP growth rate is expected to come in within its
potential of 4-6% next year. |
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CPI inflation in Singapore came in
within expectations at 0.8% in the first half of this year,
compared with 1% in 2006. |
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Inflationary pressures have since
picked up amidst the buoyant domestic economic conditions and the
recent rise in global oil and food prices. |
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Wage and rental increases have
strengthened, and the unemployment rate has fallen to a six-year
low of 2.3% in June. |
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Inflation rose to an average of 2.8%
in July-August, with about half the increase attributed to the
one-off impact of the GST hike. The higher inflation also
reflected stronger economic conditions and the pass-through of
rising business costs to retail prices. As a result, CPI inflation
is now projected to come in at 1.5-2% for 2007, from the 0.5-1.5%
range expected at the time of the last policy review. |
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Domestic price pressures are expected
to persist due to heightened supply constraints, while externally,
oil, food, and other commodity prices will remain firm into next
year. |
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Further, rising residential property
prices and rentals will lead to a more significant increase in CPI
accommodation costs. |
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For the first half of 2008, headline
CPI inflation is projected to rise to about 3.5% on a year-on-year
basis on account of the GST hike, as well as the base effects of
lower energy and car prices in H1 2007. |
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In the second half of the year,
inflation should ease, and come in at 2-3% for 2008 as a whole.1
The MAS underlying inflation measure, which excludes accommodation
and private road transport costs, is projected at 1.5-2.5% in
2008. |
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MONETARY POLICY |
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The Singapore economy has expanded at
a rapid pace in 2007, underpinned by robust growth in non-IT
manufacturing and asset market-related activities in the first
half of the year. |
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Going forward, while the economy is
expected to moderate to a more sustainable pace, inflationary
pressures stemming from external sources, as well as domestic
conditions including a tight labour market and rising rental
costs, will persist. |
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Against this backdrop, MAS will
continue with the policy of a modest and gradual appreciation of
the S$NEER policy band in the period ahead. However, we will
increase slightly the slope of the S$NEER policy band. |
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There will be no re-centring of the
policy band, or any change in its width. In our assessment, this
policy stance will remain supportive of economic growth while
capping inflationary pressures and ensuring price stability over
the medium term. |
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1
The GST increase is expected to have a one-off impact of around
0.7% point on the annual inflation rate in 2007 and 2008. |
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Source:
www.mas.gov.sg News Room 10
Oct 2007 |
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Important
Notice |
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FrontPage Edition: Thu 11 October 2007
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