12 October 2009

INTRODUCTION

1   In April 2009, MAS re-centred the exchange rate policy band downwards to the prevailing level of the S$NEER, while maintaining the zero percent appreciation path which was adopted in October 2008.  This decision was made against the backdrop of dissipating inflationary pressures and weak growth prospects for the Singapore economy in the midst of the global financial crisis. 

Chart 1
Nominal Effective Exchange Rate (S$NEER)

2   Since the last policy review, the S$NEER (Chart 1) has fluctuated in the upper half of the policy band.  This reflected the broad-based weakness in the US$ since the end of the first quarter, as well as strong capital inflows to the region.  The domestic three-month interbank rate has remained at 0.69% over the past six months, amidst low global interest rates. 

OUTLOOK FOR 2009 AND 2010

3   Following the sharp contractions in Q4 2008 and Q1 2009, the Singapore economy rebounded strongly by 22% on a quarter-on-quarter seasonally adjusted annualised (q-o-q SAAR) basis in Q2 2009.  The easing of global financial conditions and inventory restocking had benefited the domestic financial market and manufacturing activity.  According to the Advance Estimates released by the Ministry of Trade and Industry today, Singapore’s GDP expanded by a further 14.9% q-o-q SAAR in Q3 2009, with a broad range of industries across both the manufacturing and services sectors registering positive growth.  Reflecting the better-than-expected outcome, Singapore’s GDP growth forecast for 2009 has been revised upwards to between -2.5% and -2%, from -6% to -4%.The 2009 GDP growth forecast was revised to -6% to -4% during the release of Advance Estimates for Q2 2009 GDP on 14 Jul 2009. 

4   Looking ahead, the economy is not expected to sustain the strong pace of expansion seen in Q2-Q3 2009.  While prospects for the external economies have improved, final demand in Singapore’s key export markets, including for IT products, has yet to recover decisively.  Significant challenges remain in the transition to private sector-driven growth as governments prepare to exit from their expansionary policies.  Household spending, particularly in the US, continues to be constrained by the weak labour market, sluggish income growth, and lower housing wealth.  Businesses also remain cautious in their investment decisions.  Against this backdrop, the Singapore economy is likely to settle at a more gradual pace of expansion.  GDP growth in 2010 is expected to be slower than in previous post-recession periods.    

5   The domestic CPI inflation rate averaged -0.5% year-on-year over the period from April to August 2009.  With the recovery in global oil prices, consumer prices picked up in July and August on a sequential basis, following two consecutive quarters of decline.  Meanwhile, domestic cost pressures such as rentals and wages have come down significantly in response to the economic downturn.  For the rest of 2009 and into 2010, CPI inflation will continue to be driven by external factors, especially higher oil and food commodity prices in world markets.  In comparison, domestic sources of inflationary pressures will be restrained by subdued factor costs, reflecting the temporary slack in the labour market and upcoming supply of commercial space.  Nevertheless, these costs are expected to pick up in the latter half of next year as the recovery progresses.  CPI inflation is likely to be around 0% in 2009, before rising to 1-2% in 2010.  The MAS underlying inflation measure, which excludes accommodation and private road transport costs, is expected to come in around the same range.This forecast does not take into account any potential revision to the HDB Annual Value (AV), which would impact the headline CPI inflation forecast, but not that of the MAS underlying inflation rate.
 
MONETARY POLICY

6   Against continuing weakness and uncertainties in the external economic environment, the strength of the recovery in the Singapore economy is expected to be moderate beyond the initial uplift.  While there could be some upward pressures on consumer prices emanating from higher global oil and food prices, underlying domestic cost pressures will be contained. 

7   MAS will therefore maintain the current policy stance of a zero percent appreciation of the S$NEER policy path.  There will be no change to the width of the policy band and the level at which it is centred.  MAS will continue to be vigilant over developments in the external environment including the medium-term risk of stronger global inflationary pressures.

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