MAS revise up Inflation Forecast

"SINGAPORE: Singapore’s central bank has revised up its inflation forecast for 2008 for the third time. It now expects inflation to come in at between 6 and 7 per cent from its initial estimate of 5 to 6 per cent.

The Monetary Authority of Singapore (MAS) said this is due to the impact of external developments like higher oil and food prices on Singapore’s open and trade—dependent economy.

The central bank, however, is maintaining its current monetary policy stance for a slow and gradual appreciation of the Singdollar.

MAS believes that inflation in Singapore has peaked this year. Inflation has stayed unchanged for the previous three months, at 7.5 per cent — a 26—year high. For the first half of the year, consumer inflation averaged 7.1 per cent.

In the coming months, inflation is expected to moderate because the one—off impact of the GST hike last year will stop affecting headline inflation in July.

MAS also expects global commodity price increases to be milder. Domestic cost pressures are likely to ease as the economy slows and asset markets consolidate.

Recent employment surveys have also shown that labour market pressures could be easing.
While most economists agree that inflation will come off in July, they say what is key will be the rate at which it moderates.

Irvin Seah, economist at DBS Group Research, said: "It will decrease at a slower rate compared to what we thought so earlier, because of policy—induced inflationary pressure. Having said that, oil prices recently have shown signs of moderation. If that’s sustainable in longer term, it means inflation could come off quite a fair bit."

Between April 2004 and June 2008, the Singapore dollar appreciated 23.4 per cent against the greenback — a policy move that the MAS said has had a restraining effect on consumer inflation.
It said its monetary policy tightening will continue to restrain cost and price pressures going forward.

For example, while oil prices have increased by more than 70 per cent from a year ago, domestic electricity tariffs and petrol prices rose only by around 30 per cent.

Despite the full—year inflation being revised upwards, the central bank is keeping its forecast that the Singapore economy will grow between 4 and 6 per cent this year, which some economists say is optimistic.

Alvin Liew, economist at Standard Chartered, said: "We are looking at slower second half this year due to worsening external markets affecting export demand. Already, we see that the manufacturing sector did not do very well in the second quarter and might see the weakness being continued into the third quarter itself."

A hint of that could be found in manufacturing data out on Friday.

Mr Liew said: "One of the important things we can look out for is tomorrow’s manufacturing number for June. If it comes worse than expected, then we can probably see a downward revision for the manufacturing sector again for second quarter, and then maybe we’ll see the government’s forecast range being revised down. I’m looking at probably a half to one percentage point downward revision."

Between inflation and growth risks, analysts say, inflation will remain the larger risk for 2008, although this may switch in 2009 should global growth continue to slow.
Singapore’s economy grew 7.7 per cent last year."

Now I am puzzled. For MAS to revise 3 times (and more to come I believe), how on earth can they accurately (or inaccurately) say that the one-off GST hike last year's effect on inflation will stop affecting headline inflation by this month? What kind of funny 'forecast' is this if the revision is just playing a catching game with the macro trend as a whole? Price increase seldom, if it ever did, reverse it's path. Probably it is a nicer way of saying "You guys should have been used to the price increase by now".

Inflation is now a great concern and although there are some who are optimistic that inflation is wearing off with recent oil prices declining, I am still somewhat pessimistic about the second half of this year. The 4 days rally of the asian markets are somewhat weak with the STI being unable to cross the 3000 line. At the point of typing this post, asian markets fall (again) on re-newed concerns of widening credit-market losses and worsening global economic slump. Throw in the Iranian stand-off with the USA (or basically the rest of the Western Powers) on Iran's nuclear programme, a new US president, plus the wider effect of the Fannie Mae & Freddie Mac episodes unravelling, the future remains gloomy. Then you have the cold seasons coming in another 2-3 months, which may translate to higher oil price again. A word of comfort may be the OPEC cartel seems to have weakened with Iran, the 2nd largest oil producing country, to disagree over OPEC's agreement on increasing output.

Look out for more 'Economic growth justification' from the Singapore media & government in the months to come.