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MAS Committed to Price Stability in Medium Term


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by Ernie B. Calucag

 

Singapore’s central bank is committed to price stability in the medium term amid the country’s rising inflation.

Monetary Authority of Singapore (MAS) deputy managing director Ong Chong Tee on Monday said the monetary policy should temper but not totally offset cost pressures from the supply side.

Ong said MAS has been tightening monetary policy – through a stronger Singapore dollar – since April 2010. This is intended to simmer down imported inflation even as domestic inflation remains high due to supply constraints.

The central bank official noted that inflation was expected to ease gradually over the year along an “elevated trajectory” and that the MAS policy stance was aimed at keeping the economy afloat.

“With respect to cost pressures arising from supply-side inflation, monetary policy should aim to temper, but not fully offset this. Higher labour costs in the short term due to permanent supply side shifts are part and parcel of the market’s equilibrating process to guide the economy to a more sustainable growth path,” Ong said.

The government expects Singapore’s economy to expand 1 to 3 per cent this year but the MAS has said it sees weakness in electronics dragging on growth.

The MAS surprised financial markets last month by saying it will tighten monetary policy slightly because of persistent inflationary pressures.

In its half-yearly Macroeconomic Review Paper, MAS has said that inflation in the country will ease only gradually over 2012. Business costs, it added, are likely to rise as Singapore makes it harder for firms to bring in cheap foreign labour.

The central bank now expects CPI-All Items inflation to be 3.5-4.5 per cent for the year while core inflation (which excludes accommodation and private road transport) will likely be in the 2.5-3.0 per cent range, both up 1 percentage point from previous forecasts.

Singapore’s Consumer Price Index rose by about 5.2 per cent in March 2012, compared to a year ago.

More than half of the headline inflation rate, came from higher COEs for cars and the effect of higher market rent on houses.

“Over time, the cumulative appreciation of the exchange rate will temper the pace of price increases in the economy,” Ong said.

“MAS is fully committed to our objective of price stability over the medium term, even as productivity improvements arising from the significant economic restructuring will help to prevent higher costs from fuelling strong price increases.”