11 October 2005

INTRODUCTION

1   In April this year, MAS maintained the policy of a modest and gradual appreciation of the S$NEER policy band which has been adopted since April 2004.  This policy stance was reiterated in July 2005, following the announcements of changes to the exchange rate systems in China and Malaysia.

Chart 1
Nominal Effective Exchange Rate (S$NEER)

2   Since the policy review in April 2005, the S$NEER has largely fluctuated around the mid-point of the policy band.  (Chart 1)  The upward pressures on the S$ in April, which reflected markets' anticipation of a renminbi revaluation, moderated in June.  The easing of the S$ also reflected the rise of the US$ against major currencies.  Following the de-pegging of the Chinese and Malaysian currencies from the US$ on 21 July, the S$NEER appreciated to the upper half of the policy band.  This reflected strong capital inflows into the region, on the expectations of strengthening regional currencies.  These flows have abated since the latter part of August, as investor sentiments weakened due to concerns over the adverse impact of oil price increases on growth prospects in the region.  Consequently, the S$NEER moved down to the lower half of the policy band. 

3   Domestic monetary conditions have generally tightened over the past six months, in line with the rise in US interest rates.  After easing from 2.13% at end-March this year to 2.00% at end-July, the three-month domestic interbank rate picked up to 2.38% as at end-September.  Retail interest rates and mortgage rates have edged up.  

OUTLOOK FOR 2005 AND 2006

4   The Advance GDP Estimates released by the Ministry of Trade and Industry showed that the Singapore economy continued on a firm growth path in the third quarter of 2005, following broad-based expansion in H1.  Real GDP in Q3 expanded by 6.0% (on a year-on-year basis), bringing growth over Jan-Sep 2005 to an average of 4.7%.  Despite the headwinds of higher energy prices, the Singapore economy remains resilient, with both the manufacturing and services sectors continuing to grow.  In the manufacturing sector, the transport engineering segment grew strongly, while the electronics cluster improved with the strengthening of the global IT industry.  At the same time, trade-related services also posted healthy growth, reflecting sustained economic activity across the region.  The increase in tourist arrivals provided support to the retail and hospitality industries.

5   The outlook for the Singapore economy will depend on the prospects of the global economy, which barring further shocks, is expected to grow at a steady pace into 2006.   Coupled with the expansion in the global IT industry, the Singapore economy should continue to grow in line with potential in 2005 and 2006.  GDP growth is likely to come in around the upper end of the official forecast range of 3.5-4.5% this year, and 3-5% next year. 

6   Headline CPI inflation is projected to be around 0-0.5% in 2005 and to rise to 0.5-1.5% in 2006.The MAS underlying inflation measure, which excludes private road transport and accommodation costs, is forecast at around 1% this year, before rising to 1.5-2.0% next year. The rise in inflation next year reflects an anticipated increase in oil-related price pressures and a modest pick up in domestic costs.  Overall unit labour costs are set to increase by an average of 2.5-3.0% in 2005 and 2006, compared to a 4.0% decline in 2004.

MONETARY POLICY

7   Amidst continued growth in the external economies, the Singapore economy is likely to keep close to its potential output trajectory this year and in 2006.   CPI inflation is expected to rise next year on the back of higher global inflation and domestic costs, but should remain relatively contained under the current policy stance.

8.   MAS will maintain its current policy of a modest and gradual appreciation of the S$NEER policy band which has been adopted since April 2004.  There will be no change in the level, slope or width of the policy band.

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Related:

Past Monetary Policy Decisions