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Singapore maintains tight monetary policy
SINGAPORE’s central bank stuck to its tight monetary policy stance despite weaker growth in the first quarter, saying core inflation will remain elevated as a sustained recovery in advanced economies spurs a rebound in the city-state.
In a widely expected decision, the Monetary Authority of Singapore (MAS) said yesterday it will maintain its policy of allowing a “modest and gradual” appreciation of the Singapore dollar, with no changes to the slope, width or centre of the policy band.
The central bank’s latest statement on policy came as an advance estimate of first quarter gross domestic product (GDP) showed that Singapore’s economy grew a tepid 0.1 per cent in the first quarter from the previous quarter on a seasonally adjusted, annualised basis.
That matched the median forecast in a Reuters survey and marked a sharp slowdown from 6.1 per cent growth in the fourth quarter of 2013, hur t by contraction in the services sector and weakness in manufacturing.
However, growth in the city state’s economy is expected to rebound on the back of an ongoing recovery in the United States and Europe, MAS said, noting that a stretched labour market and underlying core inflation pressures justified the tight monetary policy settings.
“Barring a significant shock in the external environment, the Singapore economy should expand at a moderate pace over the course of the year, “ the central bank said.
Monetary officials expect wage pressures to persist and firms are seen likely to pass on business costs to consumer prices. Consequently,they see core inflation is to stay elevated.
“MAS will therefore maintain its policy of a modest and gradual appreciation of the S$NEER policy band,” the MAS said.
The MAS trimmed its forecast for headline inflation in 2014 to 1.5-2.5 per cent, down from two to three per cent previously,
MAS, however, maintained its forecast for core inflation, which excludes the changes in the prices of cars and accommodation, unchanged at two to three per cent.
“The fact that we’ve seen the headline inflation forecast come off, I don’t think it’s too much of a surprise. It’s important to note that core inflation was kept the same,” said Daniel Wilson, an economist for ANZ.
“The fact that core is still the same signals that inflation pressure is still on their mind,” he added.
The Singapore dollar eased, both in reaction to the lower headline inflation forecast and broad strength in the US dollar.
The Singapore dollar was last trading down 0.2 per cent at 1.2512 versus the greenback.
Commenting on its outlook for headline inflation, the MAS said imputed rentals on owner-occupied accommodation are expected to stabilise.
The Monetary Authority of Singapore also expects the impact of car prices on inflation will be negligible for the whole of 2014.
Core inflation is expected to quicken in coming months, the MAS said, adding that the labour market is likely to remain stretched.
The tight conditions in Singapore’s labour market are partly a result of the government’s efforts to boost p roductivity and reduce reliance on foreign labour.
Singapore manages monetary policy by controlling the exchange rate, rather than borrowing costs, because trade dominates t he economy.
MAS lets its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.
The central bank’s apparent lack of concern over the weak first quarter growth numbers was underscored in its optimistic take on the outlook. This is because with Singapore’s key markets of the United States is set for solid growth and Europe is steadily coming off a recession.
The government is forecasting the economy to grow an annual two to four per cent in 2014, from 4.1 per cent in 2013.
“The Singapore economy is expected to grow at a moderate pace in 2014, supported by the cyclical uplift in the industrialised economies,” the MAS said.
The Monetary Authority of Singapore added that growth in the U.S. and Europe should help to overcome the weakness in Asia’s economic powerhouse, China.
China was the top destination for Singapore’s non-oil domestic exports in 2013, with a 14 per cent share. This was followed by the European Union with 11.5 per cent and the United States at 9.3 per cent.
The MAS said growth in the first quarter was hit by soft manufacturing and trade-related activities. This was caused by adverse weather conditions in the United States which dented demand for Singapore’s exports.
In addition, the financial services industry grew at a slower pace. Monetary officials said sentiment in global markets was dampened by the US Federal Reserve’s tapering of its monetary stimulus.
The city state’s economy expanded 5.1 per cent from a year ago, the government said, matching market expectations and down slightly from a 5.5 percent growth in the fourth quarter.--Reuters
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