MAS expects S'pore inflation to cool to 4% in second half
Posted: 29 April 2008 1228 hrs

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SINGAPORE - The Monetary Authority of Singapore (MAS) has said it expects inflation, now at a 26-year high of 6.7 percent, to cool to an average 4 percent in the second half of this year.

Singapore's central bank also said on Tuesday that economic growth will slow in 2008, but the expansion will likely remain at a healthy level even under a tighter monetary policy.

"Full-year gross domestic growth of between 4%-6% is still achievable, barring a sharp downturn in the US economy," the MAS said in its semi-annual macroeconomic review, available on its Website www.mas.gov.sg. "The slower rate of expansion will bring the economy closer to its potential output path."

Earlier in April, the MAS unexpectedly tightened its monetary policy by allowing the Singapore currency to rise at a faster pace to keep a lid on import costs.

The central bank manages the local dollar within an undisclosed currency band, which it shifted higher at its meeting on April 10.

"The re-centering of the policy band... will help to alleviate inflation pressures and provide support to the economy as it eases to a more sustainable growth rate," the MAS said.

First-quarter GDP growth came in unexpectedly strong, running at an annualised seasonally adjusted rate of 16.9%, and economists said the data had calmed fears that the weakness of the US economy would drag on Singapore, giving the MAS room to tighten policy.

Singapore's economy grew by 7.7% in 2007, when consumer prices rose 2.1%.

A recent jump in food costs has been a key driver of inflation across Asia, and a further acceleration in commodity prices could not be ruled out, the MAS said.

"Even if (food and oil) prices were to level off, upward pressure on wages and rentals, reflecting domestic capacity constraints, is likely to remain," it said.

The MAS predicted inflation will peak at around 7% in the middle of the year before averaging in the upper half of a 4.5%-5.5% range for all of 2008.

Different sectors of Singapore's economy will feel varying impacts from a global downturn, the MAS said.

"In contrast to last year's broad-based growth story, the outlook for the Singapore economy in 2008 will vary significantly from industry to industry, depending on their exposure to the U.S.," the authority said.

The construction sector will be relatively protected, with a steady pipeline of contracts, including S$24.5 billion in work awarded in 2007.

"This suggests a possible surge in construction activity over the next two to three quarters, as work on projects progresses into the phase where the bulk of payment streams occurs," the central bank said. "Future demand should also remain firm, with contracts for major projects such as the integrated resorts yet to be fully awarded."

Las Vegas Sands is expected to open the Marina Bay Sands resort in 2009, and a unit of Genting International will open Resorts World at Sentosa in 2010.

The MAS said the economy should also be supported by most of the services sector and selected manufacturers such as pharmaceuticals firms and offshore oil rig makers.

However, the electronics industry will be highly exposed to an external economic slowdown, likely preventing the sector from posting a meaningful expansion.

The financial sector is also expected to weaken if markets remain in a slump, leading to lower revenues from wealth management and brokerage services.

The MAS expects the job market to remain tight, with the unemployment rate holding beneath 2 percent. - CNA/ir