MAS cuts inflation forecast, but wage pressure remains

SINGAPORE — A large supply of newly-completed homes will put a lid on housing rentals and help ease inflation this year, but the persistently tight labour market will continue to pile pressure on consumer prices as businesses pass on higher wage costs.

This was highlighted yesterday by the Monetary Authority of Singapore (MAS) in its latest semi-annual monetary policy statement, as the central bank maintained a modest and gradual appreciation for the Singapore dollar exchange policy band.

“This policy stance, which has been in place since April 2012, was assessed to be appropriate taking into account the balance of risks between external demand uncertainties and rising domestic inflationary pressures,” the MAS said.

“The outlook for the global economy has brightened, anchored by improving prospects in the G3 (the US, eurozone, Japan) as a whole. Against this backdrop, Singapore’s trade-related sectors should grow at a moderate pace,” it added.

“Nevertheless, overall growth will be capped by supply-side constraints, particularly in the labour market … Wage pressures will persist and firms are likely to pass on business costs to consumer prices,” it warned.

Credit Suisse analyst Michael Wan said: “The central bank remains concerned about the resultant impact on wage growth and underlying price pressures. While headline inflation has come down and could continue to moderate, the underlying inflationary pressure in the economy is still there and may remain so for the next two years.”

Against this backdrop, MAS maintained its 2 to 3 per cent forecast for full-year core inflation, which excludes accommodation and private road transport costs. This reflects the uptrend since last year, when core inflation accelerated from the 1.6 per cent average between January and September 2013 to the 2 per cent average between October and February this year.

But overall inflation is expected to be tamer, with the all-items consumer price index forecast at 1.5 to 2.5 per cent this year, a downward revision from the MAS’ previous 2 to 3 per cent estimate. The revision was made due to expectations of lower rentals this year, when around 24,000 public housing units and 20,000 private homes will be completed.