1 At the beginning of 2003, MAS announced that it would maintain the neutral policy stance of a zero percent appreciation for the trade-weighted Singapore dollar nominal effective exchange rate (S$NEER) policy path, with no change in the level at which the policy band is centred, or in the width of the band.
2 The S$NEER started the year in the upper half of the policy band. (Chart 1.) It was generally on a downward trend during the first few months of 2003. The S$NEER declined further over early- to mid-April as sentiment worsened, particularly following the outbreak of the severe acute respiratory syndrome (SARS). It then rebounded in late April, against the backdrop of a rapid and broad-based decline in the US$. The strength of the domestic currency was also boosted by positive news, including the containment of the SARS outbreak in Singapore, and the signing of the US-Singapore FTA. Since then, however, the S$NEER has weakened to the lower half of the policy band.
3 Reflecting the weakening of the S$NEER as well as lower domestic interest rates, overall monetary conditions continued to ease in the first half of 2003. Singapore's three-month S$ interbank rate eased from 0.81% at end-2002 to 0.75% at end-Mar and 0.63% at end-Jun, in line with the decline in global interest rates and slack liquidity conditions in the domestic money market.
OUTLOOK FOR 2003
4 In H1 2003, the Singapore economy has performed poorer than expected at the start of the year. External conditions have remained weak, even after the US-Iraq war. In addition, the SARS outbreak severely impacted the travel-related and domestic-oriented industries in Singapore. These developments have delayed the recovery in the Singapore economy. In Q2 2003, the Singapore economy shrank by 4.3% year-on-year, following growth of 1.6% in Q1.
5 More recently, there have been signs of a pick-up in economic activity. Although domestic manufacturing output remains weak, some indicators in the global electronics markets have shown tentative improvement. The SARS-hit services sectors are recovering. The economy should resume a modest recovery path in H2 2003, provided the US economy and global electronics industry strengthen further.
6 Nevertheless, downside risks remain. The strength and sustainability of the recovery in external demand- especially in the IT sector- is still uncertain, and the World Health Organisation (WHO) has warned of the possibility of a second wave of SARS infections in the latter part of the year.
7 External inflation and domestic cost pressures remain generally subdued. CPI inflation in the first five months of this year has been lower than projected. Overall consumer price inflation averaged 0.6% year-on-year in Jan-May 2003, up from 0.2% in the last quarter of 2002. The sequential rise in consumer prices during the first few months of this year can be largely traced to modest, one-off, supply-side cost increases, including the GST rate hike.
8 External inflationary pressures are likely to stay muted for the rest of 2003. Given the significant slack in the labour market, nominal earnings growth is likely to moderate further, while weak consumer sentiment should limit demand-induced increases in product prices. Our forecast for CPI inflation for 2003 has thus been lowered to 0.5-1.0%, from 0.5-1.5% at the beginning of the year.
9 In our assessment, the current level of the S$NEER is conducive to supporting the incipient recovery in the Singapore economy, and to maintaining domestic price stability in a low-inflation environment. The MAS will therefore re-centre the exchange rate policy band at the current level of the S$NEER, while maintaining a zero percent appreciation path. The width of the band will remain unchanged. This monetary policy stance will help support economic growth, particularly in view of the downside risks in the external environment. CPI inflation is expected to stay below 2% into 2004.
MONETARY POLICY SCHEDULE
10 MAS will be shifting the schedule of its semi-annual monetary policy cycle from January/July to April/October. The current monetary policy cycle of January/July was first formalised in 2001. A review of the experience in the past two years suggested that shifting the policy cycle to April and October would facilitate the incorporation of the fiscal impact of the annual Budget on the economy in the April review of monetary policy. It would also allow MAS to make better use of the forecast and data releases by the Ministry of Trade and Industry (MTI) and Department of Statistics (DOS) in assessing the economic outlook and the appropriate monetary policy stance. The next Monetary Policy Statement will be released in October 2003, together with the Macroeconomic Review (Vol II, Issue 2).