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But magnitude of MAS forecast revision surprises economists

The official word is in: Singapore’s inflation for the year has peaked barring any new external shocks, according to the Monetary Authority of Singapore (MAS).

After seeing inflation unexpectedly average7.1 per cent in the first half of the year, the MAS has raised its full-year forecast by 1 percentage point to 6 to 7 per cent.

This is the third time in the last five months that it has revised its outlook. While expecting this, economists were surprised by the magnitude of the revision.

HSBC senior economist Robert Prior-Wandesforde observed: “For inflation to remain in the previous band, it requires the Consumer Price Index (CPI) to see no increase between June and December which is somewhat optimistic.”

He added: “Everyone is surprised by the strength of inflation. Singapore is not alone but I feel the adjustments could have been made earlier.”

Explaining the revision, MAS managing director Heng Swee Keat said while global oil prices are coming down, the second quarter still saw a 27.6-per-cent increase to US$125 a barrel.

Said Mr Heng: “Our major trading partners are also facing a a rise in inflationary pressures. Apart from oil, food prices are expected to remain elevated, even as the rate of increase moderates.”

Still, Mr Heng said the new forecast range “implies that headline CPI inflation is expected to come down for the rest of the year”.

Mr Heng cited four reasons inflation should now fall: The impact of the Goods and Services Tax hike last July waning off; milder price increases for commodities; easing of domestic cost pressures; and the MAS’ own monetary policies, including “pre-emptive” tightening moves last October and April.

Between April 2004 and last month, the Singapore dollar had appreciated 23.4 per cent against the greenback, making some imports comparatively cheaper in currency terms. Mr Heng said that MAS policy moves, in particular, “have had a clear restraining effect on CPI inflation”.

For instance, while global oil prices have increased by more than 70 per cent since a year ago, domestic electricty tariffs and petrol prices have each risen around 30 per cent. Similarly, while the International Monetary Fund’s global food and beverage index has soared by 43 per cent in the same period, Singapore’s food prices “picked up by a more moderate 9 per cent”, said Mr Heng.

While exports are expected to slow in the second half of the year, MAS said it would continue to allow the Singapore dollar to appreciate to mitigate against inflationary pressures.

Overall, the Government is sticking to its original GDP growth forecast of 4 to 6 per cent at least for now.

But Mr Heng said: “Given the uncertainty in the external environment, we will be carefully monitoring the incoming data.”

“These external developments - higher oil prices, continued high prices of food and inflationary pressures in our trading partners - have affected Singapore because of our openness and heavy dependence on imports.”

He also dismissed the likelihood of Singapore falling into a technical recession - defined as two straight periods of quarter-on-quarter GDP contractions.

In fact, the MAS is expecting continued and moderate economic growth over the next two quarters, supported by the construction, marine and offshore engineering and financial intermediation services sectors.

Agreeing that Singapore would avoid a recession, Deutsche Private Wealth Management Asian strategist Chua Hak Bin nevertheless felt that GDP growth would be “lacklustre”, given how the US slump is impacting the global economy.

Said Dr Chua: “There are clear signs that Europe is seeing quite a significant slowdown. Going forward, there is a risk that Asia could cool down quite a bit as well because a lot of Asian Central Banks are tightening their monetary policies quite aggressively.”

One thing economists agree on is that the unpredictability of the global economy has been throwing forecasts out of the window.

Source : Today - 25 Jul 2008