Singapore economic expansion to spur prices, Central bank says

Singapore’s economic performance will probably stay at “high levels” for the rest of 2011, spurring inflationary pressures even as the island tightens monetary policy, the central bank said.

The economy may grow at the higher end of the government’s 4% to 6% forecast this year and inflation is likely to be at the upper half of a 3% to 4% range, the Monetary Authority of Singapore said in a report today. The central bank, which uses the currency to manage price gains, said April 14 it would allow further strengthening.
Policy makers around the world are raising interest rates, removing excess cash from their financial systems or allowing their currencies to appreciate as rising oil and commodity prices fuel inflation. Singapore’s dollar has risen to records this month and is the best performer in Asia excluding Japan in the past year against the U.S. currency.

 

“Activity is likely to be sustained at high levels for the rest of the year,” the central bank said. “Wage pressures will build up further in 2011. Tighter monetary policy will anchor inflation expectations and help to prevent second-round effects, although the pass-through of these cost increases will not be fully offset.”

 

The Singapore dollar traded at $1.2309 a dollar today, the strongest level since at least 1981 when Bloomberg data began.

 

‘TEMPORARY PULLBACK’

The Southeast Asian nation’s economy expanded at an annual rate of 23.5% last quarter from the previous three months, the trade ministry said April 14. There may be a “temporary pullback” in economic activity this quarter after growth accelerated in the three months through March, the central bank said today.

 

The city state added about 116,000 jobs last year when the economy grew a record 14.5%, while wages increased an average 5.6% in that period.

 

“With the widening of the positive output gap, there will be a concomitant increase in resource utilization and a further tightening of the labor market,” the monetary authority said. “This could lead to stronger wage growth, a greater degree of pass-through to services costs, and eventually higher CPI inflation. Additionally, imported inflationary pressures are likely to pick up in tandem with the rise in global commodity prices, especially that of oil.”

 

OUTPUT GAP

The output gap is defined as the spread between current expansion in gross domestic product and the pace of growth that ignites inflation. A positive gap signals that output is above potential, leading to inflationary pressures as the economy faces bottlenecks in meeting demand, the central bank said. A negative number indicates that the economy is producing below capacity, resulting in the easing of cost and price pressures, it said.

 

Unlike most central banks that use interest rates to control inflation, Singapore conducts monetary policy through its exchange rate, adjusting the pace of appreciation or depreciation within an undisclosed band against a basket of currencies. The central bank revalued the currency in April 2010 and said in October it would steepen and widen the trading band while seeking a modest and gradual appreciation.

 

This month, it said it would re-center the currency’s band upwards, while keeping it below the prevailing level of the nominal effective exchange rate. Lifting the currency band’s midpoint amounts to a one-off revaluation.

 

PRICE STABILITY

“In MAS’s assessment, the policy stance adopted in April 2011 is calibrated to ensure price stability in an economy at an advanced phase of expansion and to keep growth on a sustainable path,” the central bank said.

 

Asia excluding Japan still faces “substantial upside risks” to inflation, the Singapore central bank said. Asian nations are stepping up the fight against price gains as political unrest in the Middle East boosts crude oil prices, prompting central banks from China to Thailand to raise borrowing costs in April.

 

Growth in the region has helped attract foreign funds and companies, helping boost currencies and stocks in the past year.

 

“While policy rate hikes by regional central banks and capacity expansions would help to restrain inflationary pressures, high and volatile oil prices due to continued tensions in the Middle East and North Africa region and unrelenting capital inflows could still lead to a strong uptick in Asian ex-Japan inflation rates this year,” the central bank said.