13 October 2017

INTRODUCTION

1.     In the April 2017 Monetary Policy Statement (MPS), MAS kept the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at zero percent, with no change to the width of the policy band or the level at which it was centred. This policy stance was assessed to be appropriate in light of the modest outlook for growth and inflation.   

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

2.     Since the April 2017 MPS, the S$NEER has fluctuated around a strengthening trend in the upper half of the policy band. The mild appreciation over the past six months reflected, in part, broad-based US dollar weakness and the depreciation of a number of regional currencies against the S$. The three-month S$ SIBOR rose from 1% as at end-April 2017 to 1.12% at end-September.  

OUTLOOK

3.     The Singapore economy has performed slightly better than envisaged since the April 2017 policy review, while inflation has kept well within expectations. GDP growth should come in at the upper half of the 2–3% forecast range in 2017. In 2018, economic growth is expected to remain firm though it could moderate from this year. MAS Core Inflation is likely to be stable in the near term.

Growth

4.     According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy grew by 6.3% on a quarter-on-quarter seasonally-adjusted annualised basis in Q3 2017, following the 2.4% recorded in Q2. This was underpinned by the strong expansion in electronics production, reflecting an enduring upturn in global demand for IT products. Economic activity in other sectors of the economy also showed signs of improvement, albeit with some unevenness. In particular, the marine and offshore engineering and private residential construction industries remained weak, while segments within financial services picked up in tandem with regional demand. Meanwhile, trade-related services and several domestic-oriented industries such as retail trade also performed better.  

5.     For the rest of the year and into 2018, GDP growth in Singapore’s major trading partners is expected to remain firm, but could slow slightly as the global economic recovery enters a more mature phase. Global capital expenditure should gain further traction amid positive business sentiment and an investment catch-up cycle. In the G3 and most regional economies, improving labour markets will also underpin rising private consumption. However, global IT output growth is expected to ease to a more sustainable pace as the ramp-up in production linked to inventory re-stocking runs its course. China’s GDP growth could soften alongside tighter credit conditions.

6.     Against this external backdrop, growth across the Singapore economy should become more even in the quarters ahead. The boost imparted by the IT-related industries is expected to diminish but remain positive, while the pace of contraction in the weaker sectors of the economy is likely to level off. The strengthening of sentiment and gradual recovery in the labour market will also support activity in the domestic-oriented services. Abstracting from the electronics-related segments, growth rates in a broad range of industries are projected to be stable or slightly improving in 2018 compared to 2017. GDP growth should stay firm in 2018, in line with potential growth, but could moderate from this year. The expansions this year and next will be driven by productivity gains.  

Inflation

7.     MAS Core Inflation, which excludes the costs of private road transport and accommodation, edged down to average 1.5% year-on-year in July–August 2017, from 1.6% in Q2. CPI-All Items inflation fell to 0.5% from 0.8% over the same period. The decline in both measures of inflation was largely due to smaller year-ago price increases for oil-related components, and in the case of headline inflation, lower car prices as well.  

8.     On the external front, imported inflation is likely to rise mildly, as global demand improves amid ample supply in key commodity markets. Oil prices have fluctuated within a fairly narrow range over the first nine months of this year, and are expected to increase only slightly in 2018 compared to 2017. Food commodity prices are also expected to rise modestly, although localised shocks from regional supply sources could lead to transitory fluctuations in domestic food prices.  

9.     Services such as healthcare and education will continue to see moderate price increases. However, economy-wide cost pressures should remain relatively restrained. Although labour market conditions have improved recently, the slack that had previously accumulated will take time to be fully absorbed. Wage pressures are thus unlikely to accelerate in the near term, while the gradual improvement in underlying productivity growth continues. Meanwhile, other non-labour costs such as commercial and retail rentals will stay subdued. Overall, MAS Core Inflation is projected to come in at around 1.5% in 2017 and average 1–2% next year.  

10.     Accommodation costs will continue to dampen CPI-All Items inflation in 2018, albeit to a lesser extent than this year, while the positive contribution of private road transport costs will fall, in part reflecting the dissipation of inflationary effects from previous administrative measures.The administrative measures associated with higher private road transport inflation in 2017 include the expiry of the one-year road tax rebates and the upward revision in parking fees in August and December 2016, respectively. Also on administrative measures, water price increases in 2017–18 will add temporarily to inflation. U-Save rebates, which were increased from July 2017 to partially offset the impact of higher water prices for eligible households, are not taken into account in the CPI. Headline inflation is expected to come in at around 0.5% this year, and stay in the range of 0–1% in 2018.    

MONETARY POLICY

11.     The Singapore economy is likely to expand at a steady, but slightly slower, pace in 2018 compared to 2017. MAS Core Inflation is envisaged to be broadly stable throughout next year. Over the medium term, core inflation is expected to trend towards but average slightly below 2%.  

12.     MAS had indicated in the October 2016 MPS that the neutral policy stance would be appropriate for an extended period. Given the economic outlook at this stage and consistent with medium-term price stability, MAS will maintain the rate of appreciation of the S$NEER policy band at zero percent. The width of the policy band and the level at which it is centred will be unchanged.  

***

Related:

Past Monetary Policy Decisions