MAS Monetary Policy Statement
Date: 22 Feb 2001
1.1 In July last year, the MAS signalled its intent to allow a gradual, modest appreciation of the Singapore dollar on a trade-weighted basis. The economy had rebounded strongly from the Asian financial crisis, and growth momentum was likely to be sustained by a favourable external environment. At the same time, CPI inflation was expected to pick up, as the labour market tightened and wage pressures increased, and the effects of higher commodity prices filtered through to prices of consumption goods.
1.2 This policy of allowing a gradual, modest appreciation of the trade-weighted Singapore dollar has helped to cap incipient inflationary pressures, even as GDP growth came in stronger than expected. The Singapore economy grew by 9.9% in 2000, driven by robust demand for exports as well as strengthening domestic demand. The seasonally adjusted unemployment rate came in at 2.8% in December 2000, bringing the average for the year to 3.1%, from 3.5% the year before, while CPI inflation rose to 1.3% in 2000, up from 0% in 1999 and -0.3% in 1998. However, underlying inflationary pressures have remained well under control, for this stage of the business cycle. The rise in the headline CPI figure was largely due to the effects of the oil shock and increases in several administrative charges during the year.
1.3 The trade-weighted S$ has generally been appreciating over the past year in line with the policy stance, and is now within the upper-half of the policy band. The S$ bilateral exchange rates fluctuated significantly against individual major currencies in the year. Reflecting the strength of the US$, the S$ weakened against the US$ through the greater part of the year but strengthened against other currencies such as the Sterling, Euro, Australian dollar and some of the regional currencies. However, towards the end of the year, the US$ began to weaken against the Euro and S$ regained some of its earlier losses against the US$. (Chart 1.1.)
Movement of S$ against Selected Currencies
(a) Industrialised Countries
(b) Regional Countries
1.4 Going forward, economic growth is poised to moderate in 2001 as the economy comes off its cyclical rebound and the external economic environment softens with the slowdown in the US economy. Although inflationary pressures from external sources are likely to weaken as oil prices ease, domestic price increases will continue to exert some upward pressure on overall CPI inflation.
2 ECONOMIC OUTLOOK FOR 2001
2.1 The rebound in economic growth in 2000 was broad-based across the major sectors of the economy. (Chart 2.1.) The cost-cutting measures implemented during the Asian crisis, including the cut in the employers' CPF contribution rate, had boosted Singapore's competitiveness, and allowed the economy to ride on the upturn in the global electronics cycle and the recovery in the regional economies. On the expenditure side, the export led growth has broadened to consumer spending and investment in goods and machinery.
Trends in GDP Growth
(a) Overall Economy
(b) By Sectors
2.2 The growth momentum in the economy, as measured by the seasonally adjusted quarter-on-quarter annualised (SAAR) GDP growth, has remained strong, although it is expected to taper off from Q1 2001 onwards. For 2001 as a whole, the Singapore economy is forecast to grow at a slower rate of 5-7%.
2.3 Most forecasters expect world growth to moderate this year, following the strong performance in 2000. Current indications suggest that a hard landing in the US will be avoided, with growth decelerating from 5% in 2000 to 2.0-2.5% in 2001. The outlook for Japan has also dimmed with growth expected to weaken significantly this year. Only in Europe is growth expected to remain firm. The slowdown in the G3 economies in turn would imply slower growth for the East Asian economies.
2.4 The slowdown in the US economy and weakening global electronics demand will affect our manufacturing sector. In particular, the electronics industry will show a sharp slowdown, although this will be somewhat offset by stronger growth in the chemical cluster, with several major petrochemical and pharmaceutical plants coming on-stream in 2001. Overall, we expect the manufacturing sector to register a more moderate 6-7% growth in 2001, compared with 15% in 2000. We also expect some slowdown across the other sectors of the economy, except for construction, which is projected to turnaround on the back of an increase in infrastructure projects.
3.1 In line with the strong economic recovery, CPI inflation in Singapore has trended upwards since early 1999. From about 0.5% in Q4 1999, CPI inflation (year-on-year) rose steadily to 1.5% in Q3 2000, and further to 2.0% in Q4, with the inflation rate in Dec 2000 coming in at 2.1%. Overall inflation was 1.3% for 2000, up from 0% in the 1999, while the MAS underlying inflation, which excludes private road transport and accommodation costs from the headline CPI figure, came in at 1.5% compared to 0.5% the year before. Other measures of core inflation, which exclude components that exhibit excessive price volatility from the CPI basket, also showed increases ranging from 0.4-0.9% in 2000. (Chart 3.1.)
(a) CPI & MAS Underlying Inflation
(b) Measures of Core Inflation
3.2 The higher CPI inflation in 2000 largely reflected the oil price shock and hikes in several administrative charges. Of the 1.3% increase in the average level of CPI in 2000, we estimated that 0.7% points could be attributed to the oil price shock (via increases in petrol prices and electricity tariffs) and 0.3% points to increases in administrative charges. The surge in oil prices had resulted in petrol prices being raised on five occasions, and electricity tariffs on three occasions in 2000, while the prices of meat, water and tobacco rose because of administrative decisions. As we are a price taker importing all our oil, we cannot shield ourselves from price fluctuations in world markets. Higher oil prices make increases in transport fares and electricity tariffs unavoidable. However, the strength of the exchange rate over the past year has helped cushion some of the pass-through of higher world oil prices into domestic prices. We do not expect the oil price shock to lead to further increases in consumer prices beyond their one-off impact.
3.3 Imported inflation was the dominant source of price pressures in 2000, reflecting higher oil prices. (Chart 3.2a.) In contrast, domestic cost pressures are expected to be the main source of inflation in 2001. Unit labour costs (ULC) are expected to show a moderate rise of 3-5%. Labour demand is expected to remain strong in the next few quarters, although nominal earnings growth should moderate as GDP growth slows. Following the rapid economic growth in H2 2000 and significant tightening in the labour market, the economy's output gap has narrowed and is estimated to have turned slightly positive by the end of last year. (Chart 3.2b.) As growth moderates this year, the positive output gap should level off at about 0.7% of potential GDP, before picking up again towards the end of 2001. External price pressures will remain subdued as oil prices ease, although some spillover effects are expected to persist into early 2001. Together, these factors imply a slightly higher CPI inflation rate this year compared to 2000, although still within the 1.0-2.0% range. In terms of the dynamics of the inflation process, we expect CPI inflation (YOY basis) to peak in Q1 2001 at just over 2.0%, before declining and stabilising at 1.0-1.5% for the rest of the year.
Sources of CPI Inflation
(a) Imported & Domestic Inflation
(b) Output Gap
4 MONETARY POLICY
4.1 In July last year, the MAS announced that it was prepared to allow a gradual and modest appreciation of the Singapore dollar on a trade weighted basis. The trade-weighted S$ has generally been appreciating over the past year and is now within the upper-half of the policy band. The policy has been appropriate in creating conditions conducive for growth while keeping inflationary pressures in check. In 2001, Singapore's GDP growth is expected to moderate to a more sustainable rate of 5-7% in 2001, following the rapid expansion last year and in line with weakening external demand.
4.2 Domestic inflationary pressures have been rising over the past year, reflecting a tightening of the labour market and the recovery in domestic demand. This will be partially offset by lower imported inflation, if oil prices decline as expected. On balance, we expect CPI inflation to be higher this year than in 2000, but to remain below 2% for the year as a whole.
4.3 MAS will maintain its current monetary policy stance, and continue to allow a gradual, modest appreciation of the Singapore dollar on a trade-weighted basis. In our view, this policy will help to cap incipient inflationary pressures while remaining supportive of economic activity, as the economy comes off its cyclical high and GDP growth moderates to a more sustainable rate.
4.4 External developments, especially the possibility of a US hard landing, will have a major impact on prospects for the Singapore economy. These cannot be reliably predicted now, as the US economy is at a turning point. MAS will monitor closely these external developments, as well as our domestic economy. We will review the policy stance in the middle of the year, or sooner if necessary.
1 MAS underlying inflation was slightly higher than overall CPI inflation in 2000 due to the exclusion of accommodation costs, which have been on a decline throughout most of the year.
2 These measures include the volatility-adjusted inflation (which exclude items that exhibit volatile price inflation); the median inflation (which refers to the 50th percentile inflation rate at which half the components in the CPI basket have higher inflation and the other half lower); and the 30%-trimmed mean (which is calculated after removing 15% each of the components with smallest and largest inflation rates).
3 This estimate was obtained by holding the inflation of these components constant at a historical average.
4 Meat prices were affected by the compulsory installation of meat-chillers, which raised prices of meat processed locally. In addition, import prices of pork rose as the ban on live pigs from Malaysia, which had previously been our largest source of pork, resulted in a switch towards imports of more expensive processed pork from countries like Australia and the United States. Finally, water charges were also raised in July as part of a 4-year (1997-2000) plan to promote water conservation, while tobacco saw a hike in excise duty in March.