Inflation Rate Could Push Past 6% In Q1

Source : The Business Times, January 10, 2008

Upward revision of value of public housing cited

SINGAPORE'S inflation rate could soar past 6 per cent in the current quarter, beating previous estimates, as an upward revision of the value of public housing kicks in this month and food and oil prices continue to climb.

'We were previously looking at 3.9 per cent for this year, but I think it will be much higher,' United Overseas Bank economist Ho Woei Chen said yesterday.

'The revision (of annual values) will be quite significant, and we underestimated the extent of the taxi fare increase, the food price increase, oil price increase.'

The Inland Revenue Authority of Singapore has raised its assessment of values across all flat types by 18-25 per cent from Jan 1. Housing value has a significant weight in the consumer price index (CPI).

'(Inflation for the year) can potentially exceed the Monetary Authority of Singapore's forecast of 3.5 to 4.5 per cent for 2008,' Ms Ho said.

According to her, a lot will depend on the inflation figures for January. Core inflation, which excludes accommodation and private road transport costs, could also come in above the MAS forecast made in October of 1.5 to 2.5 per cent for the year, she reckons.

But 'given some expectation of lower global growth this year I think there could be some self-correcting mechanism later this year', she said.

'We could see oil prices coming in lower this year' which could bring down inflation closer to the end of the year, especially given the high base in November 2007.

The CPI that month surged 4.2 per cent year on year - a 25-year high.

UOB's head of economics and treasury research Jimmy Koh said that rising asset prices, despite a falling Sibor (Singapore Interbank Offered Rate), could fuel further asset price inflation.

The three-month rate has fallen from 3.44 per cent a year ago to 2.13 per cent at the end of last week. This is less than the inflation rate, implying a negative real interest rate.

'This is very unusual,' Mr Koh said. 'It's because of foreigners coming in and participating in Singapore's system.'

This is a new challenge because targeting the exchange rate encourages the inflow of liquidity, he said.

MAS data shows deposits by non-residents totalled $29.8 billion in October 2007 - almost three times the $10.6 billion in 2002.

Mr Koh added, however, that this is an 'affirmation of the successful restructuring of the Singapore economy', which is now showing up in local asset prices.

He said that going forward, the local economy needs to withstand the possibility of a recession in the US. 'We just have to clear off this challenge, then we will be left with a cleaner system,' he said.

He believes the Singapore dollar will embark on 'a second leg of correction against the US dollar', which will be 'slow and steady, dependent on what China will do' on revaluing the yuan.

He expects a gradual appreciation of the Sing dollar against the US unit from 1.43 at the end of this quarter to 1.39 in Q1 2009.

The yuan should move from 7.23 to the US dollar at the end of the first quarter of 2008 to 6.75 by the end of Q1 2009, according to UOB estimates.