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Forecast for 2008 raised to 6-7% but various factors suggest that price pressures may have peaked

The Monetary Authority of Singapore yesterday sought to allay fears of further rises in price pressures this year, even as it raised the inflation forecast for 2008 and spelt out the economic challenges ahead.

As had been expected following June’s 7.5 per cent pace, MAS has raised - for the third time this year - the official headline consumer price inflation forecast for 2008, by one full point to 6-7 per cent.

Speaking at a press conference on its latest annual report, MAS managing director Heng Swee Keat said the full-year rate will likely come in at around 6.5 per cent.

And with the first-half average at 7.1 per cent, the new forecast for 2008 implies that the inflation rate should ease over the rest of the year. MAS cites four reasons: Firstly, the one-off impact of last July’s Goods and Services Tax hike will disappear from this month.

Secondly, while commodity prices will likely remain high, any further price increases are expected to be milder.

At home, there are also early signs of easing cost pressures as the economy slows, Mr Heng notes. Increases in commercial rentals appear to have peaked, and recent employment surveys show more cautious hiring, he said.

And not least, MAS’ monetary tightening policy will continue to cap cost and price pressures, he added.

Between April 2004 and June 2008, the Singapore dollar appreciated by 23.4 per cent against the US greenback. As a result, while oil prices have surged by more than 70 per cent from a year ago, domestic electricity tariffs and petrol prices rose by about 30 per cent each, according to MAS.

Currently at a 26-year high, the headline inflation rate should continue to trend downwards in 2009 as well, Mr Heng said.

But Singapore cannot totally insulate itself from the hikes in global food and oil prices, and needs to ensure that external price changes do not trigger second- round effects, he said.

In a report this week, the Asian Development Bank voiced concern that a more broadbased second-round effect of price hikes may be underway across Asia, noting that the pick-up was ‘most visible’ in a few economies, including Singapore where core inflation rose to 6.8 per cent in May.

MAS’ own underlying inflation rate - one measure of core inflation that excludes housing and private road transport costs - has risen to 5.9 per cent in the first half of 2008.

Mr Heng yesterday said MAS’ current monetary policy stance - following two rounds of tightening, in October 2007 and April 2008 - ‘remains appropriate’, and will be reviewed in October.

In its annual report, MAS sees Singapore’s economic growth easing in the next few quarters in view of slowing external demand, but maintains the full-year growth outlook at 4-6 per cent.

Said Mr Heng: ‘In the coming months, activities which rely directly on G3 demand (US, Japan and Euro area), such as electronics manufacturing, or are sentiment-driven like stockbroking, will be more adversely affected by the global headwinds.’

But the more domestic-driven industries, including construction, marine and offshore engineering, and financial services, are expected to continue to provide support to GDP growth for the rest of the year, he added.

‘Given the uncertainty in the external environment, we will be carefully monitoring the incoming data.’

Global economic growth is expected to fall to 2.9 per cent this year from 3.8 per cent in 2007, according to market forecasts.

Slower growth, coupled with turbulence in the financial markets and rising inflationary pressures, all make for a most challenging environment, both globally and domestic.

Source : Business Times - 25 Jul 2008