1 In April 2006, MAS reaffirmed the policy of a modest and gradual appreciation of the S$NEER policy band. This policy stance, which has been in place since April 2004, has contributed to the low inflation environment amidst the robust economic conditions of the past few years.
Chart 1 Nominal Effective Exchange Rate (S$NEER)
2 The S$NEER has stayed in the upper half of the policy band since the last policy review. (Chart 1) This reflected a number of factors, including the weak US$ sentiment, strong investment inflows into emerging Asian markets, as well as a relatively buoyant Singapore economy. In particular, both short-term and long-term capital inflows had increased significantly in the first half of this year. More recently, the S$NEER eased in mid-September, due in part to a strengthening of the US$ following the G7 meeting last month.
3 After a strong rebound last year, the three-month domestic interbank rate rose further to 3.56% in June 2006, before declining to 3.44% as at end-September. Notwithstanding the general rise in interest rates, the demand for credit has picked up, particularly in industries such as construction and transport & communications.
OUTLOOK FOR 2006 AND 2007
4 The Advance Estimates released by the Ministry of Trade and Industry indicated that the Singapore economy grew at a faster pace in Q3 2006, following some slowdown in the second quarter. On a quarter-on-quarter seasonally adjusted annualised (q-o-q SAAR) basis, GDP expanded by 6.0% in Q3, up from 3.4% in Q2 2006. The manufacturing and transport-hub services sectors grew more strongly in Q3, after a pull-back in the preceding quarter, while growth of the domestic-oriented, tourism, and financial services sectors continued to hold firm. GDP growth this year should come in at the upper half of the official forecast range of 6.5-7.5%.
5 Going forward, the global outlook next year is clouded by signs of slower growth in the US economy, reflecting in part the ongoing correction in the housing sector. Nevertheless, the moderation in US growth has thus far been confined to specific sectors and the economy on the whole is expected to avoid a sharp downturn. China and India are likely to continue growing apace, lending support to the regional economies. Further, following the recent decline in oil prices, fears of an oil price shock crippling the world economy have receded. While signs of moderation have emerged in the global IT markets, the likelihood of a severe downturn is low.
6 Despite the continuing risks to external demand conditions, the outlook for the Singapore economy remains generally positive at this stage. GDP growth is expected to be sustained in 2007, although at a slower rate compared to 2006. The manufacturing sector will be driven by the semiconductor and marine engineering industries, while the services sector will be led by trade-related activities. Following the strong performance of the economy in 2006, GDP growth is likely to approach its medium-term potential rate next year, barring any unexpected shocks.
7 Inflationary pressures remain well-contained under the present policy stance. Headline CPI inflation rose to an average of 1.2% in the first eight months of this year, from 0.5% for the whole of 2005, reflecting stronger pass-through effects from higher oil prices. Going into 2007, tighter labour market conditions and the lagged effects of commodity price increases would continue to underpin domestic price pressures. However, the fall in oil prices, if sustained, would take some pressure off headline CPI inflation. Importantly, structural changes to the economy including a more competitive environment and diversified sources of imports have helped to cap price increases. Headline CPI inflation for 2007 is forecast to be in the 0.5-1.5% range, similar to that in 2006. The underlying inflation measure, which averaged 1.8% in the first eight months of this year, is expected to remain within 1-2% in 2007.
8 The Singapore economy has expanded strongly this year. While the growth momentum is expected to moderate, the economy should grow at close to its potential in 2007. At the same time, CPI inflation will be contained in 2006 and 2007 under the current policy stance.
9 MAS will maintain the policy of a modest and gradual appreciation of the S$NEER policy band. There will be no re-centring of the policy band, or any change to its slope or width.