MAS Sees Tame Inflation, Faster Growth

Singapore's central bank expects the economy to weather external risks in coming months, with healthy growth and minimal inflation likely to extend into 2008.

The Monetary Authority of Singapore said Wednesday it will keep a close watch on the U.S. economy and geopolitical tensions, but the outlook for robust growth and low inflation suggests it will stick to its current monetary policy in the months ahead. "If external conditions remain positive, we expect the momentum that has been generated so far to continue," Heng Swee Keat, managing director at the MAS, told a news conference announcing the central bank's annual report. Economic growth may nudge above the official forecast, but the city-state's stable growth trajectory highlights the potential for small, open economies with managed exchange-rate regimes to participate in booming global growth while controlling import-price inflation. The central bank kept its forecast for economic expansion between 5% and 7% in 2007, but Heng's remarks suggest growth may top the official target and keep pace with last year's 7.9% growth. Economists say Prime Minister Lee Hsien Loong may raise the official forecast Aug. 8 in his National Day speech - a venue for forecast revisions in the past. Heng reiterated the central bank's target for inflation between 0.5% and 1.5% in 2007 but said the final figure may fall in the "upper half" of the range. In 2008, inflation is expected to remain subdued, he said, likely within a range of 1%-2%. His remarks bolster expectations that the MAS will stick to its current policy at it October review and through the end of the year, said HSBC economist Prakriti Sofat. "I really don't think they're going to change policy," she said. "With the current outlook there's no reason to try to suppress import-price inflation." The central bank uses the exchange rate rather than interest rates as its chief policy tool because Singapore's trade flows dwarf the island's tiny domestic economy. Since April 2004 the MAS has advocated a modest and gradual appreciation of the Singapore dollar in trade-weighted terms. Citigroup economist Chua Hak Bin, also predicting the MAS will keep its policy stance in October, said much of the inflation in 2008 would be linked to the one-time impact from a recent increase in Singapore's sales tax. In its annual report, the central bank said the July 1 rise in the goods and services tax to 7% from 5% would add 0.4 to 0.6 percentage point to the inflation rate in both 2007 and 2008. The forecasts for mild inflation come despite a surge in the island-state's property market. Heng said the rising housing costs haven't filtered through to consumer prices, but the central bank will keep close watch for a possible spillover, which could affect Singapore's growing banking sector. Although broadly upbeat, the MAS addressed external risks that the open economy can't safely ignore. Heng cautioned that "a more severe unraveling" of the U.S. subprime-mortgage market and geopolitical tensions could prompt higher risk aversion across world markets. "These risks concern central bankers and regulators," he said. "If they materialize, the Singapore economy and domestic financial markets will not be immune from the spillover effects of such developments." The government's advance estimate indicates the economy grew 7.3% in the first half from the same period last year, while consumer prices rose 0.8%. Heng said Singapore's electronics sector, which foundered in early 2007, will post modest growth "in the single digits" in the second half. In the first five months of the year, electronics manufacturing grew just 3.2% from a year earlier.