Monetary Policy Statements
Published Date: 12 October 2012

MAS Monetary Policy Statement - October 2012

12 October 2012


1   In April 2012, MAS increased the slope of the S$NEER policy band slightly.  A narrower policy band was restored, with no change to the level at which the band was centred.  This policy stance was aimed at anchoring inflation expectations, ensuring medium-term price stability and keeping growth on a sustainable path.

Chart 1
S$ Nominal Effective Exchange Rate (S$NEER


2   The S$NEER has appreciated towards the upper bound of the policy band over the last six months, reflecting positive risk sentiment arising from policy responses in the US and Europe.  Nonetheless, periodic surges in global financial market stress exerted bouts of downward pressure on the S$NEER.  With low interest rates prevailing worldwide, the domestic three-month interbank rate has remained at 0.38% since December 2011.


3   The Singapore economy has weakened over the last two quarters, alongside some softening in global economic activity.  According to the Advance Estimates released by the Ministry of Trade and Industry today, Singapore’s GDP declined by 1.5% on a quarter-on-quarter seasonally adjusted annualised basis in Q3 2012, following marginal growth of 0.2% in the revised Q2 data.  The external-oriented sectors, including the manufacturing, wholesale and transport & storage industries, bore the brunt of the downturn.  However, construction and financial services remained broadly resilient.

4   While there remains considerable uncertainty over the evolving fiscal situation in the US and Eurozone, recent central bank policy initiatives worldwide have reduced the risk of a severe global recession.  The major industrialised economies as a whole are projected to expand at a sub-par pace in 2013, given ongoing deleveraging in both the private and public sectors.  This will nevertheless be supportive of moderate growth in Asia, where domestic incomes and demand are expected to hold up.  The global IT industry is also likely to register a mild recovery next year.

5   Singapore’s GDP growth in 2012 is expected to be in the 1.5-2.5% forecast range.  Although growth in 2013 is likely to come in slightly below the economy’s potential rate, the level of output should remain above its underlying potential and the economy hence continue to be at full employment.  Growth will be supported by domestic-oriented activities such as construction, and some pickup in tourism and financial services.  Manufacturing and related industries are likely to regain some traction in the latter part of 2013, barring further adverse developments in the external environment.

6   Imported price pressures have generally been muted in recent quarters, in line with the weaker external environment and the appreciating Singapore dollar.  Nevertheless, domestic costs continued to rise amid a tight labour market.  Unit labour costs increased due to weak productivity growth in the services sectors.  MAS Core Inflation, which excludes private road transport and accommodation costs, averaged 2.3% in July-August 2012, compared to a high of 3.1% in Q1 this year.  CPI-All Items inflation moderated from 5.3% in Q2 to 3.9% in July-August, reflecting the dissipation of base effects in accommodation costs.Government rebates for Srvice & Conservancy Charges (S&CC) and HDB rentals were disbursed in Q2 2011 but discontinued in March 2012. The low base effect led accommodation costs to rise sharply on a year-ago basis in Q2 2012, before dissipating in Jul-Aug.

7   Looking ahead, imported inflation, while broadly benign, will be susceptible to temporary spikes in food prices due to weather-related disruptions.  Domestic supply-side factors will become more binding.  In particular, persistent tightness in the labour market will support slightly stronger wage increases in 2013, which will continue to be passed through to consumer prices. MAS Core Inflation is expected to average around 2.5% in 2012 and 2-3% next year.

8   CPI-All Items inflation will remain elevated in Q4 2012 and Q1 2013, reflecting significant contributions from imputed rentals on owner-occupied accommodation and car prices, before moderating gradually over the rest of 2013.  For the full year, CPI-All Items inflation is likely to come in slightly above 4.5% in 2012, mainly because of higher COE premiums.At the Annual Report 2011/12 Press Conference on 25 July 2012, MAS highlighted that COE premiums could present upside risks to the 4.0-4.5% forecast for CPI-All Items inflation in 2012. It is expected to ease gradually to 3.5-4.5% in 2013.  Imputed rentals on owner-occupied accommodation and car prices will account for slightly over half of CPI-All Items inflation in both years.


9   The global economy is likely to experience an extended period of slow growth.  Against this backdrop, the Singapore economy should continue to expand but at a modest pace in 2012 and 2013.  The labour market should remain tight.

10   The appreciating stance of exchange rate policy since April 2010 has provided some restraint on the build-up of inflationary pressures, which in part reflects supply-side constraints in the economy.  MAS Core Inflation receded recently but will face upward pressure from higher food and services costs.  CPI-All Items inflation will remain elevated for some time.

11   MAS will therefore maintain the policy of a modest and gradual appreciation of the S$NEER policy band.  There will be no change to the slope and width of the policy band, as well as the level at which it is centred.  This policy stance is assessed to be appropriate in containing inflationary pressures and keeping the economy on a path of restructuring towards sustainable growth.  MAS will continue to be vigilant in assessing external economic and financial developments, and their impact on the Singapore economy.




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