Reply to COS Cut on the Singapore Dollar and Inflation
For Parliament Sitting on 10 March 2015
Name and Constituency of MP Inderjit Singh, MP for Ang Mo Kio GRC
Question: Weakening of Singapore dollar and impact on inflation
Answer by Mr Lawrence Wong, Minister for Culture, Community and Youth on behalf of Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister in Charge of MAS:
1 CPI inflation in Singapore has come down considerably in recent months, reflecting an easing of both external and domestic price pressures.
2 The main driver has been the plunge in global oil prices from an average of US$93 in 2014 to US$49 so far this year. Inflation in the countries we import from has also been largely benign. Reflecting these external developments, overall import prices in Singapore fell by 8.7% y-o-y in Q4 2014, the steepest decline since mid-2009.
3 On the domestic front, while there are cost pressures stemming from a tight labour market, the pass-through to consumer prices has been generally moderate. Enhanced medical subsidies, including those under the Pioneer Generation Package, have also led to a one-off reduction in the prices of healthcare services.
4 These developments are expected to continue to exert downward pressure on inflation in the months ahead, although some pick-up in price increases could be expected in the second half of 2015 as oil prices recover to some extent. MAS Core Inflation is projected to be 0.5–1.5% for the whole of 2015, lower than the 1.8% recorded last year. Reflecting also lower COE premiums and imputed rentals on owner-occupied accommodation, CPI All-Items inflation could average -0.5–0.5% in 2015, compared to 1.0% in 2014.
5 Against the backdrop of a more benign inflation outlook for 2015, MAS reduced the pace of appreciation of the S$NEER policy band in January. I would emphasise that the S$NEER policy band is not on a path of depreciation. It remains on a modest and gradual appreciation path, which MAS has assessed would secure the gains already made in bringing down inflation. As MAS manages the Singapore dollar exchange rate against a basket of currencies within its policy band, the gradual appreciation stance does not preclude short-term market fluctuations, particularly movements in bilateral exchange rates of the Singapore dollar against other currencies.
6 We should not confuse market movements in the S$ against the US$, for example, as indicating MAS’ policy stance. Nor does the S$/US$ rate, or any bilateral exchange rate, have greater impact on inflation than the broader S$NEER movements.
7 Indeed, there are important trade-offs from any change in policy settings as Mr Singh has pointed out. MAS has repeatedly emphasised that an excessive weakening of the domestic currency will only lead to higher inflation.
8 MAS will stay vigilant and continue to closely monitor the impact of external and domestic price developments across the range of consumer goods and services in the economy.