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Economics: Singapore Economics – Markets – Strategy SG: Inflation woes • Inflation has continued to rise owing to both domestic and external factors • The effectiveness of exchange rate policy – Singapore’s policy tool – in containing inflation is limited • Inflation will remain high for the rest of the year. Full year average inflation will register 6.4% • GDP growth in 1Q08 was strong at 6.7% YoY, led by investment, consumption and government spending. Net exports were a drag • The next two quarters will see slower growth, led by a declining manufacturing sector. But full-year growth remains on track to hit 6.0%, with growth of 6.8% expected in 2009 CPI inflation in April clocked 7.5% YoY Inflation continues to escalate Consumer prices rose by a very fast 7.5% YoY in April (Chart 1). Food price inflation hit 8.5% while transport and communication prices rose 7.0% as a result of dearer petrol, as well as higher taxi fares and car prices. Housing costs spiked 11.8%, driven by higher electricity tariffs and rentals. Chart 1: Inflation still rising % YoY 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 Inflation Core inflation Inflation hit 7.5% in Apr08 Latest: Apr08 -2 Jan-05 Jan-06 Jan-07 Jan-08 Chart 2: Food inflation may moderate % YoY 14 12 10 8 6 4 2 0 CPI - food Domestic supply px index - food Import px index - food Latest: Apr08 Jan-05 Jan-06 Jan-07 Jan-08 SINGAPORE Inflation has continued to rise on the back of both domestic and external factors. Domestically, the effects of the upward revision to the Annual Values of homes, hike in taxi fares, ERP charges, higher fuel and car prices will continue to linger on headline CPI inflation. Externally, although food prices are showing signs of moderating (Chart 2), crude oil prices have continued to surprise to the upside, creating tremendous imported inflationary pressure for this small and open economy (Chart 3). The price of crude oil has already surged beyond USD 130/ Irvin Seah • (65) 6878 6727 • irvinseah@dbs.com 120
Economics – Markets – Strategy Economics: Singapore bbl and looks likely to remain there for a while. With supply-side tightness, strong demand and speculative pressure, energy prices may remain elevated for the rest of the year. Chart 3: High oil prices will remain a threat USD/bbl 140 130 120 110 100 90 80 70 60 50 Oil prices (Brent) 40 Jan-07 Mar-07 Jun-07 Sep-07 Dec-07 Feb-08 May-08 Chart 4: Recent tightening in policy 110 Re-centering of 108 the policy band 106 104 102 100 98 96 94 Modest increase in slope Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 110 108 106 104 102 100 98 96 94 Exchange rate policy is limited The central bank clearly understands the risk of rising inflation and its impact on the broader economy. It has tightened monetary policy twice in the past year (Chart 4). In its most recent move in Apr08, the Monetary Authority of Singapore (MAS) re-centred its SGD NEER policy band by moving the centre of the band to the prevailing NEER level. The width and slope (or appreciation pace) of the band were left unchanged. Essentially, the original upper limit of the SGD NEER policy band became the centre of the new band, resulting in a one-off appreciation of about 1.5% for the SGD NEER. But the effectiveness of MAS’ exchange rate policy in containing inflation is limited. The exchange rate policy alone is not the cure-all for inflation. Instead, it should be viewed merely as a cushion against supply-side pressures, especially those stemming from high commodity prices. A stronger currency will help to offset the impact of imported inflationary, but only partially - since the start of Exchange rate policy cannot always contain inflation Chart 5: Domestic inflation has been rising too % YoY Chart 6: Strong SGD is hurting exports % YoY SGD/USD 10 20 NODX growth 1.70 15 1.65 8 SGD/USD Tradable CPI 1.60 10 Non-tradable CPI 6 1.55 5 1.50 4 0 1.45 -5 1.40 2 1.35 -10 1.30 0 -15 Latest: Apr08 1.25 -2 Latest : Apr08 -20 1.20 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 121
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