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All eyes on Sing$ as price pressure rises

(2012-04-08 23:38:35) 下一個

Business Times: Mon, Apr 09

Note: 1) Growth risks are receding gradually; 2) CPI remains high; 3) Interest rate remains low;4) tight labour market due to change in foreign labour policy that can contribute to higher costs

Solution: gradual appreciation of $ fight growing CPI without hurting export.

(SINGAPORE) Managing inflation expectations is likely to become a sharper focus of policymakers, even as attention this week centres on what Singapore's central bank will do to rein in current price pressures.

Most private sector economists now expect the Monetary Authority of Singapore (MAS) to keep its current stance of allowing a gradual appreciation of the Singapore dollar in its twice-yearly policy statement due later this week, in light of stubbornly high inflation and receding growth risks.

A few, prompted by elevated headline inflation, have even flagged the chance that MAS may allow the Singapore dollar nominal effective exchange rate to appreciate slightly more quickly.

'We see a growing likelihood that MAS will tighten policy pre-emptively in April to anchor inflation expectations amid rising oil prices and a tight domestic labour market,' said Barclays Capital economist Leong Wai Ho.

How consumers and businesses think prices will change matters as it could feed into actual price changes via decisions to invest, save, spend or negotiate wages.

And it is of rising concern now that inflation has stayed high most of last year - due largely to year-on-year jumps in COE (certificate of entitlement) premiums and the rentals that new or renewed leases are signed at. The picture is unlikely to change for some time.

'The more persistent actual inflation is, the odds that it becomes embedded in the public's psyche as a permanent feature increases,' said Citigroup economist Kit Wei Zheng. He, too, does not rule out pre-emptive tightening.

The authorities said last month that headline inflation will remain at 5 per cent in the coming months, while the MAS core inflation, which strips out accommodation and private road transport prices, will stay at 3 per cent before moderating gradually.

'If inflation is expected to be higher in the future, employees may demand higher nominal wages to offset the increasing cost of living and companies may be inclined to increase prices to offset the increasing cost of production,' said Aurobindo Ghosh, programme director at the Sim Kee Boon Institute for Financial Economics. 'Consequently, there are significant long- term impacts of inflation expectations on jobs growth and wage outlook.'

Dr Ghosh is co-creator of the Singapore Index of Inflation Expectations (SInDEx), which tracks how the public's perception of prices here changes.

Measures of inflation expectations are already incorporated into MAS' suite of macroeconomic models, Edward Robinson, MAS assistant managing director (economic policy), said at the launch of the SInDEx in January.

'It is now widely accepted that, with well-anchored inflation expectations, price shocks do not have lasting effects and central banks may find that they have less need to induce large swings in economic activity to control inflation, thereby improving the growth-inflation trade-off,' Mr Robinson said then.

Measurement is indeed one step towards anchored expectations, said Barclay's Mr Leong.

He is in favour of broader surveys of the public's inflation expectations led by the central bank, as is the case in Japan and South Korea, to better complement an existing inflation expectations measure derived from MAS' quarterly poll of professional forecasters.

Its March edition showed a median forecast of 3.5 per cent inflation in 2012, up from December's 3.1 per cent but still lower than the 4.62 per cent one-year SInDEx in December.

Mr Leong said inflation expectations are likely to 'creep higher' later this year as rising wage costs due to Singapore's shift away from low-cost foreign labour pass through to services costs.

Price changes may also take some 'hidden', indirect forms, such as smaller portions for the same price. 'If such forms of 'disguised inflation' are rampant, then even if the official CPI measure is well behaved, inflation expectations could still become unanchored,' said Mr Kit.

Without tightening policy further - not preferable should growth slow - another way to anchor expectations is to 'fight with stronger rhetoric', Mr Leong said.

On this front, Mr Kit noted 'more active communication efforts by the authorities' this year, including the introduction of joint releases from MAS and the Ministry of Trade and Industry explaining the monthly CPI and pointing out that the jump in core inflation in January was anticipated.

'Levels of communication from the central bank as well as responsible media coverage seem to be key drivers of anchoring of inflation expectations,' said Dr Ghosh, citing an initial finding of the SInDEx surveys.

He said that while the risk that price expectations may become unhinged if the public is uninformed about economic conditions remains, the availability of information through the mass media and official releases makes him 'cautiously optimistic' that Singaporeans will look at 'realistic current economic conditions to form their expectations'.

 


Source: Business Times

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