Singapore inflation holds at 26-year high
Tuesday, 24 June 2008
John Burton, FT Syndication Service
SINGAPORE: The city state's inflation rate held at a 26-year high of 7.5 per cent in May from a year ago, but economists believe it could be close to peaking and might fall later this year in contrast to other Asian countries.
"Inflation is likely to taper off in the second half (of 2008)," said Chua Hak Bin, chief Asian strategist at Deutsche Wealth Management. He cited several government measures, including an increase in the sales tax last July and higher state fees, that distorted the inflation rate over the past year.
Economists warned that the Singapore inflation rate could still climb if global price increases for fuel and food continue. Food costs rose 9.0 per cent from a year earlier, housing costs increased by 12.4 per cent to higher rents and transport costs rose 6.0 per cent due to higher fuel prices.
However, Singapore has been more aggressive than other Asian countries in tightening its monetary policy to curb inflationary pressure.
Singapore relies on the exchange rate, rather than adjusting interest rates, to guide monetary policy because of the extremely open nature of the city-state's economy.
The value of the Singapore dollar is adjusted against a basket of currencies of major trading partners. In April, the Monetary Authority of Singapore (MAS) decided to appreciate the currency in an effort to stem imported inflation.
Imported inflation is more important in Singapore than in other Asian countries because the city-state is wholly dependent on imports of fuel and food. The Singapore dollar has risen more than 5.0 per cent against the US dollar this year.
In addition, Singapore is expected to report a lower inflation rate than other countries such as India and Indonesia, because food makes up less of the consumer price index.
But Singapore will still feel the effects of rising inflation in neighbouring countries. A recent 40 per cent rise in the price of petrol in Malaysia is expected to lead to increased food prices due to high transport costs since Singapore imports much of its food supplies from there.
Foreign exchange strategists believe that if Singapore is able to keep inflation under control, the MAS is likely to maintain its current monetary policy when it meets again in October.
Allowing a further increase in the appreciation of the Singapore dollar could push the manufacturing sector into a recession since exports have slowed recently due to the strong currency.
MAS normally follows a conservative monetary policy and most economists believe that it will keep the currency at its current trading level unless inflation rises substantially.
SINGAPORE: The city state's inflation rate held at a 26-year high of 7.5 per cent in May from a year ago, but economists believe it could be close to peaking and might fall later this year in contrast to other Asian countries.
"Inflation is likely to taper off in the second half (of 2008)," said Chua Hak Bin, chief Asian strategist at Deutsche Wealth Management. He cited several government measures, including an increase in the sales tax last July and higher state fees, that distorted the inflation rate over the past year.
Economists warned that the Singapore inflation rate could still climb if global price increases for fuel and food continue. Food costs rose 9.0 per cent from a year earlier, housing costs increased by 12.4 per cent to higher rents and transport costs rose 6.0 per cent due to higher fuel prices.
However, Singapore has been more aggressive than other Asian countries in tightening its monetary policy to curb inflationary pressure.
Singapore relies on the exchange rate, rather than adjusting interest rates, to guide monetary policy because of the extremely open nature of the city-state's economy.
The value of the Singapore dollar is adjusted against a basket of currencies of major trading partners. In April, the Monetary Authority of Singapore (MAS) decided to appreciate the currency in an effort to stem imported inflation.
Imported inflation is more important in Singapore than in other Asian countries because the city-state is wholly dependent on imports of fuel and food. The Singapore dollar has risen more than 5.0 per cent against the US dollar this year.
In addition, Singapore is expected to report a lower inflation rate than other countries such as India and Indonesia, because food makes up less of the consumer price index.
But Singapore will still feel the effects of rising inflation in neighbouring countries. A recent 40 per cent rise in the price of petrol in Malaysia is expected to lead to increased food prices due to high transport costs since Singapore imports much of its food supplies from there.
Foreign exchange strategists believe that if Singapore is able to keep inflation under control, the MAS is likely to maintain its current monetary policy when it meets again in October.
Allowing a further increase in the appreciation of the Singapore dollar could push the manufacturing sector into a recession since exports have slowed recently due to the strong currency.
MAS normally follows a conservative monetary policy and most economists believe that it will keep the currency at its current trading level unless inflation rises substantially.