1 Following a re-centring of the policy band at a lower level in July 2003, MAS has maintained a zero percent appreciation path for the Singapore dollar nominal effective exchange rate (S$NEER). This policy stance was reaffirmed in October last year. MAS assessed this stance to be appropriately accommodative of the recovery in the domestic economy, in a low inflation environment.
Chart 1 Nominal Effective Exchange Rate (S$NEER)
2 The S$NEER has generally been under upward pressure since late last year, reflecting the firmer economic recovery in Singapore and the region, and the weakness of the US$. The G7's call for more flexible exchange rates also led to an influx of short-term capital. MAS intervened to moderate the strength of the S$ and to dampen excessive volatility. The S$NEER remained fairly stable until January, but more recently has appreciated towards the upper end of the policy band, supported by the release of encouraging economic data including on exports and industrial production. (Chart 1.)
3 Amidst the low global interest rate environment, and easy liquidity conditions in the domestic money market, monetary conditions remained favourable in Q4 last year. The three-month domestic interbank rate fell to 0.75% at the end of 2003, from 0.81% at end-September, and stayed unchanged until end-March this year. Retail interest rates have also been low and stable since the middle of last year. With monetary conditions remaining conducive, loan growth has picked up, mainly supported by housing loans, although there are nascent signs of a turnaround in credit to the corporate sector.
OUTLOOK FOR 2004
4 The Singapore economy rebounded strongly in H2 2003, following the rapid containment of the SARS outbreak. The synchronised upturn in the global economy and pickup in global IT demand supported the growth momentum into the fourth quarter of 2003 and the beginning of this year. The Advance GDP Estimates for Q1 2004, released by the Ministry of Trade and Industry (MTI), show that the economy expanded by a robust 11% on a quarter-on-quarter seasonally adjusted annualised basis, or 7.3% compared to the same period last year. Strong performance was recorded in both the manufacturing and services sectors.
5 Going forward, the outlook for the Singapore economy has improved. While downside risks to the outlook remain, on balance, the upturn in the global economy and IT markets is likely to be sustained. MTI has assessed that the GDP growth range for 2004 is likely to exceed its current forecast of 3.5-5.5%. Given this, the economy's output gap is projected to narrow and turn positive by the end of the year. The labour market is also expected to strengthen this year, with the unemployment rate improving gradually.
6 Consumer price inflation has trended up in recent months, averaging 1.4% (y-o-y) in Jan-Feb 2004, compared to 0.5% and 0.7% in the last two quarters of 2003 respectively. The rise largely reflected supply-side factors, including the pass-through effects of global commodity-related price increases and the GST hike in January 2004. Domestic price pressures remain subdued but could intensify if the growth momentum remains strong over the next few quarters, causing the labour market to tighten. For 2004 as a whole, the forecast for CPI inflation has been revised upwards to the 1.5-2.0% range.
7 Against a more favourable growth outlook for the Singapore economy, and the risk of rising inflationary pressures, MAS is shifting from a zero percent appreciation path to a policy of modest and gradual appreciation of the S$NEER, starting from the mid-point of the current policy band. The width of the band will remain unchanged. This policy stance will be supportive of economic growth, while ensuring low and stable inflation over the medium term.