Singapore: Inflation Watch

Singapore’s central bank lifted its 2010 inflation forecast to between 2.5 and 3.5 per cent today and said it was carefully watching property and asset prices, though it saw no significant change in underlying price pressures.(Reuters;18 November 2009)

The Monetary Authority of Singapore also said the behaviour of the Singapore dollar’s exchange rate band, which it uses to set monetary policy, was consistent with its policy for zero appreciation in the currency.

The central bank, which decided against encouraging currency appreciation in October, is expected by economists to potentially tighten policy when it next meets in April, after the trade-dependent city-state emerged from its worst ever recession.

“The Monetary Authority of Singapore might be watching inflation more carefully but I think they will still be keeping the exchange rate band steady till April,” said David Cohen of consultancy Action Economics.

“The global economic situation is still uncertain. An awful lot can happen between now and April.”

Singapore said today that the upward revision in its forecast for the consumer price index in 2010 was due to a pending increase in property tax rather than any broader increase in underlying inflation.

The previous forecast was for CPI to rise 1 to 2 per cent next year.

“There has not been any significant change in our assessment of underlying cost and price pressures in the economy from the time of the monetary policy statement release in October,” Monetary Authority of Singapore Deputy Managing Director Ong Chong Tee said at a briefing.

The higher inflation view came after Singapore’s economy grew 14.2 per cent in the third quarter on a seasonally adjusted annualised basis, revised slightly down from an earlier estimate of 14.9 per cent growth but in line with forecasts.

Singapore gave its first forecast for 2010 growth at between 3 and 5 per cent, but cautioned that a recovery in advanced economies remained fragile with a boost from stimulus measures and inventory cycle adjustments likely to taper off in the second half of 2010.

The Singapore dollar was little changed at 1.3847/62 versus the US dollar by 0810 Malaysian time, versus 1.3842 before the GDP data. The stock market edged up 0.6 per cent.

Economists were more bullish than the government.

“The risk is on the upside for both inflation and growth. Crude oil prices have risen from US$35 (RM118) to US$80 (RM270) a barrel, there’s higher commodity prices, and China, India and many non-OECD countries are recovering quicker-than-expected which will push up prices,” said Selena Ling, head of treasury research at Oversea-Chinese Banking Corp.

“People tend to look in the rear-view mirror and see Lehman, deflation, etc, but if you look forward, the risks are more on the upside in many Asian countries.”

Japan’s economy expanded at its fastest pace in more than two years in the third quarter as government stimulus helped domestic demand produce its first contribution to growth in six quarters.

China, South Korea and Indonesia also have reported a pick up in annual economic growth in the September quarter compared with the previous quarter.

An economic rebound in Asia’s major Western export markets, however, has been far more tepid amid weak consumer sentiment.