In the October 2017 Monetary Policy Statement, MAS kept the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at zero percent, with no change to the width of the policy band or the level at which it was centred. This policy stance was assessed to be appropriate given the broadly stable outlook for GDP growth and MAS Core Inflation.
Since October 2017, the S$NEER has appreciated in the upper half of the policy band, apart from a brief period of decline in early 2018. This development reflected, in part, broad-based US dollar weakness and depreciation in a number of regional currencies against the S$. The three-month S$ SIBOR rose from 1.1% as at end-October 2017 to 1.5% at the end of the year, before falling in January 2018. It subsequently resumed its upward trend to reach 1.4% as at end-March.
The Singapore economy has evolved as envisaged since the October 2017 policy review, and should continue on a steady expansion path in 2018. However, an escalation of the US-China trade dispute remains possible, and if it occurs, will have significant consequences for global trade. MAS Core Inflation is likely to rise gradually over the course of 2018 and into 2019.
According to the Advance Estimates released by the Ministry of Trade and Industry, the Singapore economy grew by 1.4% on a quarter-on-quarter seasonally-adjusted annualised basis in Q1 2018, a moderation from the 2.1% recorded in Q4 last year. In comparison, year-on-year, GDP rose by an estimated 4.3% in Q1 2018, following growth of 3.6% for 2017 as a whole.
The sectoral composition of growth has been uneven. Within manufacturing, the semiconductor segment has continued to expand at a strong pace, but the marine and offshore engineering industry remains subdued. In services, retail and food services saw some pullback in activity after the pickup in Q4 last year, while business services posted further growth. The financial services sector also recorded varying outturns across its segments, with both domestic and offshore lending outperforming.
Global final demand is projected to stay firm in 2018, but the pace of expansion could slow slightly as the cyclical upturn matures. Positive business sentiment and improving labour markets continue to underpin the ongoing recovery in private consumption and investment in the external economies. However, rising trade tensions between the major economies pose a downside risk to the growth outlook.
Barring a setback in global trade, growth in the Singapore economy should continue at a broadly steady pace in the quarters ahead. The expansion will still be driven by the trade-related industries, although their contribution should ease from last year. The financial and business services sectors should continue to benefit from the broader pickup in income growth, including in the region. At the same time, the weaker segments of the economy, including construction and domestic-oriented services, are expected to show some improvement, with the latter supported by the upturn in private consumption.
On the whole, GDP growth in 2018 should come in slightly above the middle of the forecast range of 1.5–3.5%. Productivity will continue to contribute to growth this year, even as total employment is projected to expand following a marginal contraction in 2017.
MAS Core Inflation, which excludes the costs of private road transport and accommodation, edged up to average 1.6% year-on-year in January–February 2018, from 1.4% in Q4 2017. This was largely due to stronger price increases inc services and retail items, which more than offset lower food price inflation. In comparison, CPI-All Items inflation eased to 0.2% from 0.5% over the same period. This is because of the decline in the cost of private road transport, as COE premiums fell and the impact of the upward revision in parking fees in December 2016 faded. The disbursement of additional rebates for Service & Conservancy Charges in January 2018 also temporarily dampened headline inflation.
In the quarters ahead, imported inflation is likely to rise mildly, as global demand strengthens amid ample supply conditions in key commodity markets. Although global oil prices had experienced sporadic spikes in Q1 2018, they should ease as supply remains responsive. For the full year, oil prices should increase moderately compared to 2017. Food commodity prices are also projected to rise slightly.
Domestic sources of inflation are expected to rise gradually in 2018, with prices of consumer services increasing as domestic demand picks up. Further improvements in resident employment should support a faster pace of wage growth in 2018 compared to 2017. However, the extent of consumer price increases will remain moderate, because of relatively subdued retail rents and constraints on firms’ pricing power due to market competition.
Private road transport inflation should decline in 2018, as the inflationary effects from previous administrative measures dissipate. However, accommodation costs will fall by a lesser extent than in 2017. Overall, CPI-All Items inflation should increase in the quarters ahead, and is projected to be in the upper half of the 0–1% forecast range for 2018 as a whole.
Should economic conditions evolve as expected, MAS Core Inflation will rise gradually over the course of this year. For 2018, core inflation should come in within the upper half of the 1–2% forecast range.
The Singapore economy is likely to remain on its steady expansion path in 2018. Upward pressures on MAS Core Inflation are expected to persist over the course of this year and beyond, underpinned by an improving labour market.
MAS has therefore decided to increase slightly the slope of the S$NEER policy band, from zero percent previously. The width of the policy band and the level at which it is centred will be unchanged. This policy stance is consistent with a modest and gradual appreciation path of the S$NEER policy band that will ensure medium-term price stability.
The measured adjustment to the policy stance takes into account the uncertainty in macroeconomic outcomes presented by ongoing trade tensions. MAS will continue to closely monitor economic developments.
Re-disseminated by The Asian Banker