12 April 2019

INTRODUCTION

1.   In its October 2018 Monetary Policy Statement, MAS announced a slight increase in the slope of the S$NEER policy band. There was 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 given the expectation that MAS Core Inflation would rise modestly in the near term before stabilising at just below 2%. The Singapore economy was also projected to remain on its steady expansion path.   

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

2.   The S$NEER has appreciated in the upper half of the policy band since October 2018. This mainly reflected the weakening of the US dollar alongside the shift in the US Federal Reserve’s monetary policy stance, and of the Euro and Sterling. The three-month S$ SIBOR rose from 1.6% in October 2018 to 1.9% as at end-March 2019. 

3.   The Singapore economy has slowed, and is likely to expand at a modest pace in the coming quarters. Core inflation has come in lower than projected due to weaker global oil prices and a stronger impact from the liberalisation of the retail electricity market. Consequently, MAS is downgrading its 2019 forecast range for MAS Core Inflation to 1–2%.

4.   According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy expanded by 1.3% on a year-ago basis in Q1 2019, following the 1.9% growth in Q4 2018. Over the last six months, the contribution of the manufacturing sector to GDP growth has waned, reflecting the maturing of the global electronics cycle and the economic slowdown in China. Meanwhile, activity in the services sectors stayed firm, supported mainly by financial and business services, as well as information & communications services. The construction sector has also recovered from a protracted period of weakness.  

5.   The growth momentum of the global economy has moderated by more than expected at the turn of the year alongside sluggish trade. Significant uncertainty remains over the short-term outlook. However, policy stances in China and the US have become more accommodative, while global financial conditions have eased. All in, global growth for 2019 is forecast to slow, following the strong expansions in the last two years.

6.   Against this backdrop, Singapore’s GDP growth is expected to come in slightly below the mid-point of the 1.5–3.5% forecast range in 2019. Even as growth in the trade-related cluster decelerates, pockets within the financial, business and ICT services sectors will continue to benefit from steady domestic demand in the region and increased investments in digitalisation. Meanwhile, domestic-oriented sectors such as construction and consumer-facing services are expected to stay on a recovery path.  

7.   In all, the pace of growth will be slightly below potential this year, following two years when it was above trend. With the positive output gap expected to narrow, inflationary pressures will be kept in check.

8.   MAS Core Inflation, which excludes the costs of accommodation and private road transport, fell to 1.6% year-on-year in January–February 2019, from 1.8% in Q4 2018. This was mainly due to a smaller increase in the price of electricity & gas, in light of lower global oil prices and higher adoption of cheaper electricity plans by consumers. Reflecting the decline in core inflation, CPI-All Items inflation eased to 0.4% from 0.5% over the same period.  

9.   In 2019, external sources of inflation are likely to be benign, as global oil prices are expected to come in lower for the year as a whole than in 2018, while food prices should only pick up slightly on average. On the domestic front, labour market conditions remain firm and will support moderate wage increases, such that unit labour costs should continue to rise. However, an acceleration in inflationary pressures is unlikely against the backdrop of slower GDP growth, uncertainties in the global economy, as well as the continuing restraining effects of MAS’ monetary policy tightening in 2018.  

10.  At the same time, the decline in electricity prices due to the roll-out of the Open Electricity Market (OEM) has been sharper than anticipated, as a larger number of households have switched to plans that are priced lower than the regulated tariffs. The take-up rate is likely to increase in the months ahead, which should further reduce electricity prices. Accordingly, MAS is revising the 2019 forecast range for MAS Core Inflation to 1–2%, from 1.5–2.5% previously. Core inflation is likely to come in near the mid-point of the revised forecast range.  

11.  On the non-core components of the CPI, private road transport costs should be largely unchanged from 2018. Although petrol prices will likely be lower, car prices could see some increase given an anticipated tapering in the supply of COEs. Meanwhile, imputed rentals on owner-occupied accommodation are set to decline at a slower pace this year, compared to 2018. The 2019 forecast for CPI-All Items inflation was revised down to 0.5–1.5% from 1–2% in February, taking into account the decline in global oil prices in late 2018. This forecast for headline inflation remains unchanged.    

MONETARY POLICY

12.  GDP growth in the Singapore economy has eased, bringing the level of output closer to its underlying potential. Despite some pickup in labour costs, inflationary pressures are mild and should remain contained.  

13.  MAS will therefore maintain the current rate of appreciation of the S$NEER policy band. There will be no change to its width and the level at which it is centred. This policy stance is consistent with a modest and gradual appreciation path of the S$NEER policy band that will ensure medium-term price stability. 

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Related:

Past Monetary Policy Decisions