Singapore’s central bank on Thursday raised its inflation forecast for 2011 and warned of downside risks to growth, underlining difficulties that will be faced by Asian policymakers in the second half of the year.
The Southeast Asian city-state now expects prices to rise by 4-5% this year, up from an earlier forecast of 3-4%, as the cost of permits to own a car and rents have climbed at a faster-than-expected pace.
The Southeast Asian city-state now expects prices to rise by 4-5% this year, up from an earlier forecast of 3-4%, as the cost of permits to own a car and rents have climbed at a faster-than-expected pace.
“Singapore’s GDP growth forecast range remains at 5-7% for now but uncertainties have clearly increased,” Monetary Authority of Singapore (MAS) Managing Director Ravi Menon said at a briefing.
“There is more uncertainty in the U.S. and Europe compared to three months ago,” he added.
Asian governments are grappling with rising asset and food prices while ensuring that growth remains relatively robust.
China, wrestling with inflation at a three-year high, also saw manufacturing output contract in July for the first time in 12 months, HSBC said on Thursday.
Singapore’s prospects of higher-than-expected inflation had already been flagged in a Reuters poll earlier this week that showed economists raising their median 2011 CPI estimate to 4.2% from 4% in April.
“Singapore is facing a mini-stagflation scenario. Growth has stalled while headline inflation remains elevated. MAS faces a difficult decision come October, trading-off between growth and inflation,” said Bank of America Merrill Lynch economist Chua Hak Bin.
“We expect MAS to maintain the “slightly steeper” appreciation bias, given the inflation upturn,” he added.
MAS’ Menon said the outlook for the central bank’s core inflation measure, which excludes price changes in car prices and other areas influenced by government policy, remained unchanged at 2-3% for 2011.
David Cohen, director of Asian forecasting at Action Economics, said the upward revision to the city-state’s inflation outlook was consistent with recent data.
“The housing sector is contributing to this higher inflation. However it is still moderate range... MAS still has a few more months to see whether it wants to adjust policy any higher but it underscores that inflation remains the focus right now,” he said.
MAS’s Menon said the central bank continues to be concerned about inflation although the core reading remains steady.
“Core inflation remains slightly above the historical average of 1.7%. Inflation pressures in the economy, while not acute, bear close watching.”
“(Headline) inflation is expected to creep back up to slightly above 5% for the next couple of months before slowly trending down towards the end of the year,” he added.
RECORD LOSS
MAS on Thursday also revealed it lost nearly $11 billion in the financial year ended March 2011, its biggest-ever annual loss, as the strong local dollar reduced the value of reserves held in other currencies.
“MAS made investment gains of $12.3 billion but recorded an overall loss of $10.9 billion due to the strong Sing dollar,” Menon said.
The central bank, which had lost money on an annual basis only once before in its 40-year history, made a net profit of $9.96 billion in 2009/10.
MAS held $299.8 billion in assets at end-March 2011, with foreign financial assets accounting for $287.7 billion, according to its annual report which was released on Thursday.
Despite the setback, Menon said there will be no change in the central bank’s practice of investing in liquid foreign assets to ensure the stability of the Singapore dollar.
“We need our assets to be in fairly liquid form to meet our monetary policy operation needs,” he added.
Menon said MAS’ assets were more diverse than most central banks, with no single currency making up more than one-third of overall exposure.
The central bank incurred $170 million in staff costs in financial year 2010/2011, an increase of 24% over 2009/2010.
MAS said the rise reflected the 7% rise in headcount over the past two years as well as higher variable payments as the Singapore economy swung from an extremely bad year to an extremely good year.
The Singapore dollar (SGD=) has been one of the strongest-performing Asian currencies in the past two years, and is up about 5.6% since the start of 2011.
The Singapore dollar rose 10% against the U.S. dollar and 5.5% against the euro over the course of MAS’ 2010/11 financial year.
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