By REUTERS
Singapore is not facing deflation even though headline consumer price inflation is likely to stay negative throughout 2015, the central bank said on Tuesday, adding that current policy settings were appropriate given the expectation prices will increase by next year.
The consumer price index has contracted, on an annual basis, every month between November and May. It is likely to be negative the rest of 2015, so consumer inflation is likely to be in the lower half of the central bank’s -0.5% to 0.5% forecast range this year, Monetary Authority of Singapore (MAS) managing director Ravi Menon said.
“I want to emphasise, we are not facing deflation. The price declines we’ve seen are neither persistent nor pervasive,” he said.
While accommodation costs and the prices of car permits have decreased, there have been moderate price increases in more than half of the items in the all-items CPI basket, including food.
“So the man in the street… is not experiencing deflation or negative inflation. It is a concentrated price decline in a few items that’s dragging down the overall headline number.”
Core inflation is expected to be in the lower half of this year’s 0.5% to 1.5% forecast range, he said, adding that the risk of a further downgrade to the forecast is low.
Ravi Menon
“Our baseline assumption is that in Q4 we should start to see some increase at least in core inflation,” Menon added.
Since the labour market remains tight, wage pressures could rise quickly, he said.
“While wage pressures and the pass-through from wage cost to prices have been modest this year, there is every possibility that they could pick up next year,” Menon said.
Menon said the MAS is “very comfortable” with its current policy settings and that they were appropriate for ensuring medium-term price stability. He added, though, that what the MAS decides at its scheduled policy review in October would depend on coming economic data.
Expectations defused?
After the central bank’s remarks, the Singapore dollar turned firmer to hit a session high of 1.3694 per the US dollar after the central bank’s remarks.
“Recent scattered expectations for policy easing in October will probably be defused on the back of the latest MAS comments,” said Emmanuel Ng, a foreign exchange strategist with OCBC Bank.
MAS, which on Tuesday released its annual report, said it is reviewing its forecast for economic growth this year. The current forecast is for gross domestic product to expand 2-4 percent.
Government data released last week that showed Singapore’s economy contracted in the second quarter.
The lacklustre growth performance, coupled with a drop in year-on-year core inflation to a five-year low of 0.1% in May, has put renewed focus on the possibility of a further easing of monetary policy later this year.
In January, the MAS surprised markets by easing policy in an unscheduled decision, saying a plunge in commodity prices had significantly altered the inflation outlook.
— by Masayuki Kitano & Saeed Azhar
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