INTRODUCTION
1. In the April 2024 Monetary Policy Statement (MPS), MAS maintained the rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, with no change to the width of the band or level at which it was centred. Since then, the S$NEER has continued to strengthen in the upper half of the appreciating policy band.
Chart 1
S$ Nominal Effective Exchange Rate (S$NEER)
GROWTH BACKDROP
2. Economic activity in Singapore’s major trading partners has remained broadly stable in recent months. Resilient business investment in the US supported the pick-up in global electronics manufacturing and trade, with regional economies benefitting from this recovery. In China, growth was underpinned by strong exports, even as private consumption slowed. In the quarters ahead, global final demand should gain from the anticipated lowering of interest rates and continuing investments in information technology. However, the outlook is subject to uncertainties, including around the pace and timing of monetary policy easing, as well as the impact of geopolitical and trade conflicts on confidence and production costs.
3. MTI’s Advance Estimates show the Singapore economy expanded by 0.4% on a quarter-on-quarter seasonally-adjusted basis in the second quarter of 2024, close to the 0.3% recorded in the preceding quarter. Growth in Q2 was underpinned by modern services and electronics manufacturing. In comparison, the pace of expansion in the consumer-facing sectors moderated after the event-driven boost earlier in the year.
4. Growth momentum in the Singapore economy should improve in the second half of 2024. GDP growth is likely to come in closer to its potential rate of 2–3% for the full year. The manufacturing and financial sectors will be bolstered by the broadening tech upturn and the expected decline in global interest rates. Meanwhile, growth in the domestic-oriented sectors is projected to normalise to pre-pandemic rates.
INFLATION OUTLOOK
5. MAS Core Inflation
6. CPI-All Items inflation edged down to 2.8% y-o-y in Q2 from 3.0% in the preceding quarter. Apart from the decline in core inflation, private transport inflation also moderated due to lower COE prices compared to a year ago.
7. MAS Core Inflation is expected to step down more discernibly in Q4 this year and into 2025. Notwithstanding some increases in shipping rates, global producer prices have only risen modestly thus far. Global crude oil prices have fallen from their recent peak in April, while prices of most food commodities as well as of intermediate and final goods have been stable. Meanwhile, domestic unit labour costs should rise at a significantly slower rate this year compared to the preceding two years, amid the dissipation of labour market tightness and an anticipated pick-up in productivity.
8. Amid moderate imported inflation and easing domestic cost pressures, the seasonally adjusted q-o-q rate of core inflation has declined to an annualised rate of 2.1% in Q2. The sequential pace of price change, which better captures the most recent inflation in the economy, is expected to be lower in the second half of 2024 compared to H1.
9. For 2024 as a whole, MAS Core Inflation is expected to average 2.5–3.5%. Excluding the impact of the increases in the GST rate, core inflation is forecast at 1.5–2.5%.
10. CPI-All Items inflation is now projected to average 2.0–3.0% this year, down from the previous forecast of 2.5–3.5%, mainly reflecting lower-than-anticipated private transport inflation in recent months. Excluding the impact of the GST, CPI-All Items inflation should come in at 1.5–2.5%.
11. Both upside and downside risks to the outlook remain. The pace of domestic labour cost increases may reaccelerate if aggregate demand turns out stronger than expected, causing renewed inflationary pressures. An intensification of geopolitical tensions could also add to imported costs. However, if global interest rates stay high for longer than expected, external demand could weaken and dampen the growth momentum in the Singapore economy. This in turn would induce a faster pace of easing in cost and price pressures.
MONETARY POLICY
12. The Singapore economy is expected to strengthen over the rest of 2024, with the slightly negative output gap closing by year-end. Barring renewed shocks to costs, core inflation should step down more discernibly in Q4, and fall further to around 2% in 2025.
13. Against this backdrop, current monetary policy settings remain appropriate. The prevailing rate of appreciation of the policy band will keep a restraining effect on imported inflation as well as domestic cost pressures, and ensure medium-term price stability.
14. MAS will therefore maintain the prevailing rate of appreciation of the S$NEER policy band. There will be no change to its width and the level at which it is centred. MAS will closely monitor global and domestic economic developments, and remain vigilant to risks to inflation and growth.
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[1] MAS Core Inflation excludes the costs of accommodation and private transport from CPI-All Items inflation.
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