SINGAPORE: The Monetary Authority of Singapore (MAS) on Monday lowered its headline inflation outlook to 1.5-2.5 per cent for 2014 due to decreased cost pressures from accommodation and private road transport.
But the central bank also said it is keeping its policy of allowing a modest and gradual appreciation of the Singapore dollar.
This is because core inflation - which excludes accommodation and car prices - is still a key concern.
"Amid the large supply of newly-completed housing units, imputed rentals on owner-occupied accommodation are now expected to stabilise in 2014," the central bank said in its half-yearly monetary policy statement.
"MAS is revising the forecast for CPI-All Items inflation in 2014 from 2-3 per cent to 1.5-2.5 per cent, mainly reflecting this weaker outlook for imputed rentals over the rest of the year," it added.
Singapore's headline (CPI-All Items) inflation averaged 2.4 per cent for the whole of 2013, down from 4.6 per cent in 2012.
The central bank also said car prices should add negligibly to inflation for the whole of 2014, although there could be upward pressure in coming months due to the low base a year ago when COE premiums fell.
But while MAS sounded benign on car prices and accommodation, it warned that domestic cost pressures, especially those stemming from a tight labour market, will remain the key driver of inflation.
"Firms are expected to continue to pass on accumulated costs, which could lead to broad-based price increases across the economy," it said.
Accordingly, MAS core inflation is expected to average 2-3 per cent in 2014, up from 1.7 per cent in 2013.
Core inflation is seen as a better gauge of domestic cost pressures as it excludes volatile components like accommodation and car prices which are driven by administrative measures.
Vishnu Varathan, senior economist at Mizuho Bank, said: "The first-order concern for the MAS is that these increased wage pressures will pass through and percolate much wider in the economy, resulting in heightened inflation expectations.
"So that's not just going to impact competitiveness today, but because it could lead to prices spiralling up, that would actually damage -- even to some extent -- permanently, the competitiveness of Singapore."
With Monday’s announcement, MAS has kept its monetary policy unchanged for two years since April 2012, suggesting that inflation risks still outweigh growth concerns.
The growth outlook is fairly benign with the recovery in the G3 economies of the US, Europe, and Japan expected to offset a slower Chinese economy and softer domestic demand in the ASEAN economies.
"Now we know that the global economy is actually picking up quite robustly, particularly coming from the recovery of the economies in the G3,” said Francis Tan, economist at United Overseas Bank.
"That's going to support the overseas export demand for our local manufacturers, so the slight increase in the strength of the Singapore dollar may not be too detrimental for their export prices and export demand."
The central bank also said it stands ready to curb excessive volatility in the Singapore dollar's nominal effective exchange rate.
Looking ahead, economists say this volatility could arise from the impending end of the US quantitative easing programme, and the impact from rising US interest rates. - CNA/ac/ec
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