Low Headline Inflation Unlikely to Affect Singapore's Policy Stance

The policy stance of the Monetary Authority of Singapore is unlikely to change as a result of the low headline inflation for July which came in at 1.2% year-on-year, as core inflation – MAS’ preferred measure of inflation – remains high compared to historical levels.

Core inflation rose 2.2% yoy compared to 2.1% yoy in June. Unit labour costs (ULC) – the secondary measure of inflation – rose 4% yoy in Q2, reflecting sustained increases in nominal wages and weak productivity growth, according to The Royal Bank of Scotland plc.

With growth expected to exceed potential for most of the remainder of the year, risks to the inflation outlook too are likely to remain on the upside.

"Firms are likely to continue to pass more of their accumulated costs to end-consumers in an improving economic environment. Therefore, both demand-pull and cost-push factors are likely to continue to remain as risks," says RBS.

Meanwhile, upward pressure on wages is likely to persist with the unemployment rate likely remaining close to 2% this year – a view supported by the hiring intentions component of the business survey index remaining exceptionally strong across all sectors.

RBS also does not expect productivity gains to be large enough to counter the rise in wages and, consequently, expects upward pressure on ULCs to continue.

As for Singapore's exchange rate policy, RBS expects the MAS to keep the slope, width and center of the SGD Nominal Effective Exchange Rate (NEER) band unchanged in October.

"By our estimates, the NEER is currently calibrated for a 2.25% annualized appreciation, with the band being positioned 1.5% on either side of the midpoint. The NEER is currently tracking towards the mid of the band where we expect it to linger," said the research.

RBS also forecasts the USD-SGD currency pair to be at 1.22 by end-2014.

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