MONETARY POLICY STATEMENT
Friday, 10 October 2003

In July this year, MAS re-centred the exchange rate policy band at the prevailing level of the Singapore dollar nominal effective exchange rate (S$NEER). The zero percent appreciation path and the width of the band were maintained.

The level of the S$NEER was assessed to be conducive to supporting the incipient recovery in the Singapore economy, and maintaining domestic price stability in a low inflation environment, particularly in view of possible downside risks to the outlook for this year.

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

The S$NEER strengthened through much of July and August, as negative sentiments towards the regional SARS-hit countries lifted. (Chart 1.) The S$ continued to appreciate against the US$ in September but it was outpaced by the Yen and the Euro, and as a result, the S$NEER eased back towards the centre of the policy band. This trend continued after the G7 communiqué on 20 September.

Overall monetary conditions remained easy over the past three months, despite the slight increase in domestic interest rates. The three-month domestic interbank rate edged up to 0.81% at end-September, compared to 0.63% at end-June, on the back of a sharp rise in long-term bond yields. However, retail interest rates have remained stable.

OUTLOOK FOR 2003

The economic outlook for the Singapore economy has improved since the last Monetary Policy Statement in July. Following the effective containment of SARS, the economy has rebounded in Q3, making up for much of the lost output in Q2.

Visitor arrivals, air passengers passing through Changi Airport, and hotel occupancy rates are almost back to their pre-SARS levels. Together with the pick-up in pharmaceuticals output, the Singapore economy is estimated to have expanded by 15% on a quarter-on-quarter seasonally adjusted basis (q-o-q SAAR) in Q3, compared to a drop of 11% in the previous quarter.

In year-on-year terms (y-o-y), GDP growth was 1.0% in Q3 compared to -4.1% in Q2. The external environment has also turned more favourable, with clearer indications of an upturn in the G3 economies, while the global IT indicators have continued to improve.

The Singapore economy should benefit from the strengthening external environment for the rest of the year and into 2004. The official forecast for Singapore's GDP growth in 2003 remains at 0-1%.

Nevertheless, the recovery in the short-term will be fairly modest when compared to previous cycles, partly due to the ongoing structural changes in the Singapore economy. The unemployment rate is expected to average 4.5-5.0% for the year as a whole.

Consumer price inflation averaged 0.4% year-on-year in Jan-Aug 2003, up from -0.4% in 2002. CPI inflation is expected to remain subdued for this year and the next, with the external inflationary environment and domestic cost pressures remaining benign.

The existing slack in the factor markets would continue to dampen cost pressures, while the weakness in consumer sentiment would limit demand side pressures. Against this backdrop, CPI inflation is likely to come in at around 0.5% for 2003, before rising moderately to 0.5-1.5% in 2004, as the recovery in the domestic economy picks up pace next year.

MONETARY POLICY

The Singapore economy is expected to continue its recovery path going forward. Nevertheless, it will take time for the expansion to gather momentum and become more broad-based, before a significant improvement in the labour market can be seen. Against this backdrop, it is necessary for monetary policy to remain supportive of the recovery in the domestic economy, while keeping inflation low.

MAS will therefore maintain the current neutral policy stance of a zero percent appreciation of the S$NEER policy path in the period ahead, with no change in the level at which the policy band is centred and in the width of the band.