April 14, 2014 / 2:32 AM / 4 years ago

Singapore sticks to tight monetary policy, economy slows in Q1

SINGAPORE (Reuters) - Singapore’s central bank stuck to its tight monetary policy stance on Monday despite weaker growth in the first quarter, saying core inflation will remain elevated as the economy grows at a moderate pace this year.

In a widely expected decision, the Monetary Authority of Singapore (MAS) said it will maintain its policy of allowing a “modest and gradual” appreciation of the Singapore dollar, with no changes to the slope, width or centre of the policy band.

The MAS trimmed its forecast for headline inflation in 2014 to 1.5-2.5 percent, down from 2-3 percent previously, but kept its forecast for core inflation, which excludes the changes in the prices of cars and accommodation, unchanged at 2-3 percent.

The Singapore dollar dipped briefly after the MAS statement, but much of the weakness appeared to be linked to a broadly stronger U.S. dollar. It was last trading down 0.3 percent to 1.2521.

“The fact that we’ve seen the headline inflation forecast come off, I don’t think it’s too much of a surprise. It’s important to note that core inflation was kept the same,” said Daniel Wilson, an economist for ANZ.

“The fact that core is still the same signals that inflation pressure is still on their mind,” he added.

Commenting on its outlook for headline inflation, the MAS said imputed rentals on owner-occupied accommodation are expected to stabilise and the impact of car prices on inflation will be negligible for the whole of 2014.

Core inflation, meanwhile, is expected to pick up in coming months, the central bank said.

“Barring a significant shock in the external environment, the Singapore economy should expand at a moderate pace over the course of the year. Wage pressures will persist and firms are likely to pass on business costs to consumer prices. Consequently, MAS Core Inflation is expected to stay elevated,” the Monetary Authority of Singapore (MAS) said in its half-yearly statement.

“MAS will therefore maintain its policy of a modest and gradual appreciation of the S$NEER policy band,” the MAS said, adding that it was keeping the slope, the width and the centre of the band unchanged.

The MAS had been widely expected to maintain its policy of allowing a “modest and gradual” appreciation of the Singapore dollar to guard against inflationary pressures, as core inflation was expected to rise later this year due to wage cost pressures from a tight labour market.

Singapore manages monetary policy by controlling the exchange rate, rather than borrowing costs, because trade dominates the economy. MAS lets its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.

The central bank’s latest statement on policy came as an advance estimate of first-quarter gross domestic product (GDP) showed that Singapore’s economy grew 0.1 percent in the first quarter from the previous quarter on a seasonally adjusted, annualised basis.

That matched the median forecast in a Reuters survey of 0.1 percent, and was a sharp slowdown form 6.1 percent growth in the fourth quarter of 2013.

Growth in the latest three months was hit by an annualised 1.8 percent quarter-on-quarter contraction in the services sector, from 6.1 percent growth in the fourth quarter of 2013.

Slowing momentum in wholesale and retail trade as well as finance and insurance sectors crimped activity in the service sector.

The economy expanded 5.1 percent from a year ago, the government said, matching market expectations and down slightly from a 5.5 percent growth in the fourth quarter.

Singapore’s trade-dependent economy is seen likely to be underpinned this year by an expected pick-up in U.S. and European growth.

Still, the city-state’s economy could face a bumpy road ahead, given concerns about a slowdown in China and possible spillover effects from the U.S. Federal Reserve’s ongoing tapering of its monetary stimulus.

Additional reporting by Jongwoo Cheon; Editing by Shri Navaratnam

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