MAS revises inflation forecast upwards
Higher COE and housing prices prompt move, which economists say was within expectations
by Teo Xuanwei 04:46 AM Jul 22, 2011
SINGAPORE – Higher property prices, rentals and car prices are among the factors that have prompted the Monetary Authority of Singapore (MAS) to revise its inflation forecast for this year to between 4 and 5 per cent, up from between 3 and 4 per cent.
In its annual report released yesterday, the MAS noted that the “tight labour market will continue to exert upward pressure on costs and prices, while global oil and food prices are likely to remain firm given supply shocks and strong demand as the global economy slowly recovers”.
And amid the global inflationary pressures, significant risks in the global economy and financial systems could derail growth, MAS managing director Ravi Menon cautioned at a press conference.
The MAS and the Ministry of Trade and Industry are reviewing Singapore’s Gross Domestic Product growth forecast for this year.
For now, the MAS said the earlier 5 to 7 per cent growth forecast remains intact. But Mr Menon added that the economy could expand in the lower half of the range if the pick-up from the downturn in the second quarter is weaker than currently expected.
Speaking to Today, CIMB regional economist Song Seng Wun ruled out the prospect of stagflation – high inflation and low economic growth – as the “primary source of inflation are from two sources, and not broad-based”.
Mr Song noted that prices outside of housing and transport are “relatively stable”.
At the press conference, Mr Menon reiterated that the MAS’ projection for the year’s core inflation, which does not factor in car and housing costs, remains unchanged at 2 to 3 per cent.
According to economists, the upward revision was within expectations.
Barclays Capital senior regional economist Leong Wai Ho told Channel NewsAsia: “The reasons for the revision are … the higher Certificate of Entitlement prices and higher rental contracts during this period. These are drivers that will hit out at mainly middle-income consumers rather than the lower-income.”
Mr Song, who has revised his inflation forecast from 3.8 to 4.7 per cent, said housing and car costs made up some 40 per cent of the higher consumer prices. Still, Credit Suisse’s regional economist Robert Prior-Wandesforde told the Wall Street Journal that “the tightness of the labour market means core inflationary risks are high and rising”.
Mr Menon pointed out that the much lower 2.2-per-cent inflation rate in April and May partly reflected that MAS’ pre-emptive tightening of monetary policy “has helped to dampen some cost increases”.
He added: “A stronger Singapore dollar has helped, not just by filtering oil and food price increases, but also by providing a restraining effect on the economy.”
On a day when the Singapore dollar hit a record, Mr Menon also noted that the policy stance of allowing the Singapore dollar to appreciate “remains appropriate”.
Deputy Prime Minister Tharman Shanmugaratnam, who is also Finance Minister and MAS chairman, wrote in the MAS annual report that this tighter policy “will ensure price stability over the medium term and keep growth on a sustainable path”.
Economists expect the MAS to keep the policy unchanged. Capital Economics’ Vishnu Varathan said: “There’s no real reason to panic or have an alarmist reflex at the moment.”
On the global outlook, Mr Tharman noted that “the ongoing sovereign debt crisis in the European periphery poses significant risks – both to global economic growth and financial stability”.
Mr Menon said the “prognosis for global economy has taken on a more cautious tone” for the second half of the year.
The disruption to regional supply chains, in the aftermath of the earthquake in Japan in March, has been more severe than initially expected, he said.
Global demand has also slowed because of the increase in oil prices and there are greater uncertainties now in the US and Europe compared with three months ago, he added. Still, Mr Menon said: “But we expect growth in our external markets to continue, albeit, at a slow and uneven pace.
Source : TODAYonline – MediaCorp Press Ltd’s copyright
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