1 In October 2006, MAS reaffirmed the policy of a modest and gradual appreciation of the S$NEER policy band. This policy stance, which has been in place since April 2004, has contributed to the low and stable inflation environment amidst the robust economic growth of the past few years.
Chart 1 Nominal Effective Exchange Rate (S$NEER)
2 The S$NEER has fluctuated near the upper end of the policy band during the past six months. (Chart 1) This reflected a number of factors, including the broad-based weakness of the US$, a resurgence of capital inflows into the region, as well as a relatively buoyant Singapore economy. Against expectations over the appreciation of the S$ and the liquidity conditions in the market, the three-month domestic interbank rate has come down to 2.9% as at end-March 2007, from 3.4% in September 2006.
OUTLOOK FOR 2007
3 The Singapore economy performed well in 2006, with expansions across a broad range of industries. Net job creation was strong and the unemployment rate has fallen to 2.7%, the lowest in five years. The Advance Estimates released by the Ministry of Trade and Industry suggest that GDP growth continued at a steady pace in Q1 2007, supported by ongoing expansions in the transport-hub, finance, and construction sectors.
4 Looking ahead, the external environment is expected to remain broadly supportive of sustained growth. Financial conditions are mostly favourable with inflation well-contained. Growth in Asia is expected to be anchored by the major economies of China, India and Japan. However, a number of risk factors have recently emerged. US economic growth has lost some momentum, led by the correction in its housing sector, and the problems in the subprime mortgage market may yet lead to some retraction in consumer spending. Further, the global IT industry remains weak on a build-up of inventories and strong competitive price pressures.
5 Reflecting some of these weaknesses, Singapore’s export growth has moderated, and the manufacturing sector is expected to expand at a slower rate this year than in 2006. Conditions in the IT industry are likely to remain sluggish till later in the year, although the non-electronics clusters are expected to maintain healthy growth. Economic activity will be buttressed by the continued growth in the services industries, including financial and business services as well as the tourism-related cluster. Overall, GDP growth is projected to come in at 4.5-6.5% in 2007, down from the nearly 8% recorded in 2006.
6 While the 2% point GST hike (effective in July 2007) is estimated to raise CPI inflation by about 0.5% point each in 2007 and 2008, the full extent of the impact will be tempered by other offsetting fiscal measures. Import costs have been well-contained by the appreciation of the S$NEER over the past few years. However, other business costs including rentals have risen in the past year. In the labour market, overall wage increases have been moderate, although pockets of tightness have recently emerged in some industries. This year, CPI inflation is projected to come in at 0.5-1.5% under the present policy stance, similar to the 1% registered in 2006. MAS underlying inflation is also expected to hold steady at 1-2% in 2007.
7 Growth in the Singapore economy is expected to be slower this year after the rapid pace in 2006, reflecting the moderation in the global economy and IT industry. There are potential downside risks to growth and MAS will closely monitor external economic and financial developments. While domestic cost pressures have emerged in some segments of the economy, they remain relatively contained and overall inflationary pressures are expected to stay low.
8 MAS will maintain the policy of a modest and gradual appreciation of the S$NEER policy band in the period ahead. There will be no re-centring of the policy band, or any change to its slope or width.