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In October last year, MAS announced that it would
maintain the policy of a modest and gradual appreciation of the S$NEER which
has been adopted since April 2004. |
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MAS assessed this policy stance to be supportive
of economic growth, while ensuring low and stable inflation over the medium
term. |
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Since the Monetary Policy Statement (MPS) in
October 2004, the S$NEER has fluctuated within the upper half of the policy
band. The strong upward pressures on the S$ reflected broad-based US$ weakness
amidst renewed concerns over the current account deficit in the US. |
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In addition, the S$NEER was supported by strong
capital inflows into the region, underpinned by general optimism over the
regional economic outlook. |
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MAS intervened significantly in Q4 2004 and into
early 2005 to moderate excessive upward pressure on the S$. |
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Since mid-March, the S$NEER has trended downwards,
as the US$ rebounded following the interest rate hike by the US Federal
Reserve amidst signs in the US of rising inflationary pressures and continuing
firmness in the economic data. The S$NEER has now eased back towards the
centre of the policy band. |
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While domestic monetary conditions have tightened
over the past six months, overall liquidity conditions remain loose. |
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Domestic interbank rates have risen in tandem with
the increase in the US federal funds rate, with the three-month domestic
interbank rate rising from 0.75% at end-May 2004 to 1.44% by end-Sep 2004. It
rose further to 2.13% as at end-March 2005. Retail interest rates have
remained broadly unchanged, although there have been some modest increases in
mortgage rates. |
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Outlook For 2005 |
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Following the robust economic performance last
year, the Advance GDP Estimates released by the Ministry of Trade and Industry
(MTI) showed that the Singapore economy expanded at a more moderate 2.4% in Q1
2005 (on a year-on-year basis). On a quarter-on-quarter (QOQ) seasonally
adjusted annualised basis, GDP contracted by 5.8% in Q1 2005. |
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The decline largely reflected fluctuations in
biomedical manufacturing, which are not expected to have significant spillover
effects on the broader economy or on overall employment conditions. |
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The services sector saw continued growth, with
support from the financial, business and retail (excluding motor-vehicle
sales) segments, although tourism-related activity was temporarily affected by
the recent tsunami disaster. |
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The global economy is forecast to continue growing
at a healthy pace this year, albeit a moderation from the strong performance
in 2004. |
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In particular, output trends in the electronics
industry suggest that the slowdown in the global IT sector will be shallower
and shorter this time round compared to the downturn in 2001, reflecting
improvements in inventory management. |
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Key forward-looking electronics indicators have
showed early signs of levelling off, and a modest strengthening in IT demand
is expected in the second half of the year. |
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Against this backdrop, and taking into account the
Q1 performance, GDP growth for 2005 is projected to come in at the lower half
of the forecast range of 3-5%. Notwithstanding the slower pace of growth, the
economy will remain close to its potential output path, following its sharp
rebound in 2004. The unemployment rate is expected to ease through the year
and average around 3.5%, compared to 4.0% in 2004. |
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Headline consumer price inflation averaged
0.2% in Jan-Feb 2005, down from 1.7% in 2004. The lower headline inflation
rate partly reflects the effects of the change in the weights and composition
of the CPI basket beginning in 2005. The MAS underlying inflation measure was
stronger at 1.0% in the first two months of this year.1 |
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For 2005 as a whole, headline CPI inflation is
expected to come in at 0-1%, before rising to 1-2% in 2006. The underlying
inflation measure is projected to be around 1% this year and 1-2% in 2006. The
gradual increase in inflationary pressures in the economy reflects higher
commodity prices, rising wages, and increases in services charges. |
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Domestic unit labour costs are also expected to
turn positive after declining last year, reflecting the moderation of cyclical
productivity gains and continued improvement in the labour market. There are
further upside risks to these sources of inflation, including from higher than
expected oil prices and the possibility of a greater pass-through of cost
increases into consumer prices. |
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Monetary Policy |
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The underlying growth support for the Singapore
economy remains intact, despite the weaker GDP growth outcome in Q1 2005. At
the same time, inflationary pressures continue to be a concern over the medium
term, with the economy at close to its potential output level and with upside
risks to external inflation. |
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MAS will therefore maintain the current policy of
a modest and gradual appreciation of the S$NEER policy band.2 With
the S$NEER currently close to the mid-point of the policy band, there is scope
for exchange rate flexibility in line with developments in external conditions
in the period ahead. |
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1 The MAS
underlying inflation measure excludes private road transport and accommodation
costs, which can be significantly affected in the short-term by changes in
administrative controls and policies. |
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2 There
will be no change in the slope or the width of the policy band. |
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Source:
Monetary Authority of Singapore Press
Release 12 Apr 2005 |
MAS Monetary Policy Statement
