Monetary Policy Statements
Published Date: 02 January 2003

MAS Monetary Policy Statement - January 2003

2 January 2003


1   MAS has maintained a neutral policy stance in 2002.  Since the beginning of 2002, it has adopted a zero per cent appreciation path for the exchange rate policy band, centred on the level of the trade-weighted Singapore dollar nominal effective exchange rate (S$NEER) prevailing at the start of the year.   This policy stance, reaffirmed by MAS in its mid-year review in July 2002, reflected subdued inflationary conditions and the need to facilitate economic growth.

Chart 1
Nominal Effective Exchange Rate (S$NEER)

2   The S$NEER fluctuated largely within the upper half of the policy band throughout 2002. (Chart 1.)  After initially strengthening in January and February, the S$NEER eased somewhat, fluctuating within a relatively narrow range in the second quarter of the year.  The S$NEER subsequently strengthened in July and August, boosted by encouraging GDP numbers and strong export performance.  In the following months, as the economy softened, the S$NEER trended downwards, especially in the aftermath of the Bali bombing.  Since late October, the S$NEER has strengthened again, reflecting in part the generalised weakening of the US$. 

3   Domestic interest rates remained low throughout 2002, reflecting a soft global interest rate environment and slack liquidity conditions in the domestic money market.  Singapore's three-month S$ interbank rate eased from 1.25% at end-2001 to reach a low of 0.75% at end-July, before firming to 1.38% at end-September.  Since then, however, it has fallen to 0.81% as at end-December 2002.


4   The outlook for the Singapore economy has become less favourable since mid-2002, as the external environment deteriorated.  Weak corporate balance sheets and excess capacity in the high tech industry, combined with geopolitical uncertainties, have weighed down on the US economy.  Growth in Europe and Japan has remained sluggish.  Against this backdrop, the Singapore economy failed to maintain the momentum of the first half of 2002.  On a quarter-on-quarter, seasonally adjusted annualised basis, GDP contracted by 9.9% in Q3 and grew by just 0.1% in Q4.  On a year-on-year basis, GDP grew by 3.9% in Q3 and 2.6% in Q4, resulting in growth of 2.2% for 2002 as a whole.

5   Looking ahead, the potential conflict in Iraq poses near-term downside risks to growth.  We expect the Singapore economy to remain sluggish in H1 2003, before staging a more balanced and firmly-grounded recovery in the second half of this year, as the external environment improves and the global electronics industry strengthens.  Overall for 2003, Singapore's GDP growth is expected to come in between 2-5%.

6   CPI inflation is estimated to average around 0.5% for 2002 as a whole, largely reflecting the slack in domestic factor and product markets.  Inflationary pressures in 2003 should remain muted.  The external inflation environment is likely to remain benign, while the slack labour market and excess capacity in the economy should help restrain domestic cost pressures, particularly in consumer services.  In addition, fiscal measures introduced in 2002 would continue to hold down prices of certain consumption items such as private road transport.  While headline CPI inflation will be boosted by the 1% point increase in the GST rate in 2003, weak consumer sentiment will limit the scope for retailers to pass on the GST hike.  As was the case in 1994 when a 3% GST was implemented, GST-related price hikes are unlikely to trigger a second round increase in the general price level, beyond the one-off effect.    Overall CPI inflation for 2003 is projected at 0.5-1.5%.


7   Economic growth is likely to be sluggish in the next quarter or so, reflecting uncertainties and weaknesses in the external environment.  A firmer recovery is likely to take hold only in H2 2003.  Inflation is expected to remain low. 

8   MAS will therefore maintain the neutral policy stance of a zero percent appreciation for the S$NEER policy path in the period ahead, with no change in the level at which the policy band is centred and in the width of the band.  This policy stance will provide sufficient flexibility to support the recovery in the domestic economy while keeping inflation low.



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