Monetary Policy Statements
Published Date: 12 April 2005

MAS Monetary Policy Statement - April 2005

12 April 2005


1   In October last year, MAS announced that it would maintain the policy of a modest and gradual appreciation of the S$NEER which has been adopted since April 2004.  MAS assessed this policy stance to be supportive of economic growth, while ensuring low and stable inflation over the medium term. 

Chart 1
Nominal Effective Exchange Rate (S$NEER)

2   Since the Monetary Policy Statement (MPS) in October 2004, the S$NEER has fluctuated within the upper half of the policy band.  The strong upward pressures on the S$ reflected broad-based US$ weakness amidst renewed concerns over the current account deficit in the US.  In addition, the S$NEER was supported by strong capital inflows into the region, underpinned by general optimism over the regional economic outlook.  MAS intervened significantly in Q4 2004 and into early 2005 to moderate excessive upward pressure on the S$.  Since mid-March, the S$NEER has trended downwards, as the US$ rebounded following the interest rate hike by the US Federal Reserve amidst signs in the US of rising inflationary pressures and continuing firmness in the economic data.  The S$NEER has now eased back towards the centre of the policy band.

3   While domestic monetary conditions have tightened over the past six months, overall liquidity conditions remain loose.  Domestic interbank rates have risen in tandem with the increase in the US federal funds rate, with the three-month domestic interbank rate rising from 0.75% at end-May 2004 to 1.44% by end-Sep 2004.  It rose further to 2.13% as at end-March 2005.  Retail interest rates have remained broadly unchanged, although there have been some modest increases in mortgage rates. 


4   Following the robust economic performance last year, the Advance GDP Estimates released by the Ministry of Trade and Industry (MTI) showed that the Singapore economy expanded at a more moderate 2.4% in Q1 2005 (on a year-on-year basis).  On a quarter-on-quarter (QOQ) seasonally adjusted annualised basis, GDP contracted by 5.8% in Q1 2005.  The decline largely reflected fluctuations in biomedical manufacturing, which are not expected to have significant spillover effects on the broader economy or on overall employment conditions.   The services sector saw continued growth, with support from the financial, business and retail (excluding motor-vehicle sales) segments, although tourism-related activity was temporarily affected by the recent tsunami disaster. 

5   The global economy is forecast to continue growing at a healthy pace this year, albeit a moderation from the strong performance in 2004.  In particular, output trends in the electronics industry suggest that the slowdown in the global IT sector will be shallower and shorter this time round compared to the downturn in 2001, reflecting improvements in inventory management.  Key forward-looking electronics indicators have showed early signs of levelling off, and a modest strengthening in IT demand is expected in the second half of the year. 

6   Against this backdrop, and taking into account the Q1 performance, GDP growth for 2005 is projected to come in at the lower half of the forecast range of 3-5%.  Notwithstanding the slower pace of growth, the economy will remain close to its potential output path, following its sharp rebound in 2004.  The unemployment rate is expected to ease through the year and average around 3.5%, compared to 4.0% in 2004.  

7   Headline consumer price inflation averaged 0.2% in Jan-Feb 2005, down from 1.7% in 2004.  The lower headline inflation rate partly reflects the effects of the change in the weights and composition of the CPI basket beginning in 2005.  The MAS underlying inflation measure was stronger at 1.0% in the first two months of this year.The MAS underlying inflation measure excludes private road transport and accommodation costs, which can be significantly affected in the short-term by changes in administrative controls and policies. 

8   For 2005 as a whole, headline CPI inflation is expected to come in at 0-1%, before rising to 1-2% in 2006.  The underlying inflation measure is projected to be around 1% this year and 1-2% in 2006.  The gradual increase in inflationary pressures in the economy reflects higher commodity prices, rising wages, and increases in services charges.  Domestic unit labour costs are also expected to turn positive after declining last year, reflecting the moderation of cyclical productivity gains and continued improvement in the labour market.  There are further upside risks to these sources of inflation, including from higher than expected oil prices and the possibility of a greater pass-through of cost increases into consumer prices.


9   The underlying growth support for the Singapore economy remains intact, despite the weaker GDP growth outcome in Q1 2005.  At the same time, inflationary pressures continue to be a concern over the medium term, with the economy at close to its potential output level and with upside risks to external inflation. 

10   MAS will therefore maintain the current policy of a modest and gradual appreciation of the S$NEER policy band.There will be no change in the slope or the width of the policy band. With the S$NEER currently close to the mid-point of the policy band, there is scope for exchange rate flexibility in line with developments in external conditions in the period ahead.



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