Consumer prices could rise by up to 4.5% next year: MAS

Erica Tay, Straits Times 20 Nov 07

Central bank sticks to policy of letting Sing$ strengthen gradually, modestly

PRICE pressures ranging from rising oil prices to a squeeze on resources at home, are likely to push consumer prices up by 3.5 to 4.5 per cent next year, after rising by about 2 per cent this year.

Singapore's central bank announced its new 2008 forecast yesterday, raising it from the 2 to 3 per cent projected last month.

But the Monetary Authority of Singapore (MAS) added that its stance on the Singapore dollar's exchange rate remains 'appropriate', and it has no plans for an earlier-than-scheduled policy review before its April meeting.

MAS' policy is currently to allow the Singdollar to gradually and modestly strengthen.

Changing the policy to allow it to strengthen more quickly will help battle inflation. This is because Singapore imports many of its goods from overseas and these will become cheaper if the Singdollar is strong.

MAS deputy managing director Ong Chong Tee told a quarterly press conference yesterday that an inter-meeting review was 'not on the cards'.

At the same briefing, Mr Ravi Menon, second permanent secretary of the Ministry of Trade and Industry, maintained that government measures to ease the squeeze on the supply of office space and labour will help to cool cost pressures.

A host of factors are behind the faster rise in the consumer price index (CPI), including 'technical' factors such as July's one-off goods and services tax hike.

Another factor is next January's revision to the annual assessed values of homes by the tax authorities, which will in turn lift the housing cost component of the CPI.

'Neither of them represents a sustained rise in inflationary pressures,' said Mr Menon. 'The effects of both will wear off over the second half of 2008.'

In addition, prices of crude oil and agricultural produce - which Singapore imports - have been rising globally.

The MAS' move last month to allow the Singdollar to rise at a slightly faster pace would go towards curbing imported inflation.

The economic boom at home is driving up wages and rents amid a tight labour market and a shortage of office space. However, measures have been taken to increase the sale of land in business parks, lease out more vacant state buildings and release land for transitional offices, said Mr Menon.

And raising the foreign labour ratio and S-Pass (Employment Pass) quota will help ease manpower bottlenecks in the rapidly growing construction sector, he added.

'In short, has the economy gotten hotter? Yes. Has it gotten too hot? No,' he said.

While a slowing United States economy will cause Singapore to expand at a slower tempo, inflationary pressures are shaping up to be a more pressing concern than slowing economic growth, said economists.

'Growth concerns have become secondary to inflationary concerns,' said Standard Chartered Bank economist Alvin Liew.

Fortis Bank strategist Joseph Tan believes further monetary tightening via a faster appreciation of the Singdollar is likely at the next policy review. 'The policy stance may change from a 'gradual and modest' appreciation of the Singdollar to an 'immodest' appreciation,' he quipped.

However, Mr Liew said: 'We believe the current Singdollar policy stance is enough to deal with imported inflation. The worry lies with domestic cost pressures, that is, wages and rents rising too much. If these are the concerns, there might be more measures to keep these pressures in check.'


What is pushing up the consumer price index?

• July's one-off hike in the goods and services tax.
• Next year's rise in the housing cost component of the CPI, due to higher annual assessed values for homes.
• Domestic cost pressures due to a squeeze on labour and office space.
• Rising prices of crude oil and other commodities.