Chart of the Day: What you need to know about Singapore’s monetary policy

MAS says a calibrated adjustment in the policy stance will ensure price stability in the medium term.

The Monetary Authority of Singapore reported:

Following the manufacturing-led decline in economic activity in Q4 2011, the Singapore economy gained momentum and expanded by 10.0% q-o-q saar in Q1 2012. Nonetheless, with the global outlook remaining subdued, Singapore’s economy is likely to experience modest growth of 1-3% in 2012.

CPI-All Items inflation eased to 4.7% year-on-year in the first two months of 2012 from 5.5% in Q4 2011 due to smaller increases in COE premiums. At the same time, MAS Core Inflation accelerated on average in January and February as firms continued to pass on earlier wage increases to the prices of consumer services. In the near term, car prices could stay elevated if de-registrations remain at current low levels.

MAS Core Inflation was also assessed to have upside risk given the tight labour market. MAS has thus revised the forecast for CPI-All Items inflation in 2012, from 2.5-3.5% to 3.5-4.5%. The forecast for MAS Core Inflation was also raised from 1.5-2% to 2.5-3.0%. Inflation was expected to remain elevated over the next few months before easing gradually in the second half of 2012 as the pace of cost increases and their pass-through to consumer prices moderate.

Accordingly, MAS kept the S$NEER policy band on a modest and gradual appreciation path in April 2012. However, the slope of the policy band was increased slightly, with no change to the level at which it was centered. MAS also restored a narrower policy band. This measured adjustment in the policy stance will continue to anchor inflation expectations, ensure price stability over the medium term, and keep GDP growth on a sustainable path.