S'pore Inflation To Peak Above 8%: Credit Suisse

Source : The Business Times, June 12, 2008

Inflation in Singapore is expected to peak above 8 per cent in May or June, but the risk of higher prices stifling economic growth is not imminent, a Credit Suisse economist said yesterday.

'High inflation is negative for growth but it will depend on real income decline,' the Swiss bank's emerging markets economics group director Cem Karacadag told BT.

'In Singapore's case, real wages are still holding up well,' he said. 'I do not think at this moment in time, we are at a level that will stifle growth.'

The government has raised its full-year forecast range for Consumer Price Index twice since the start of this year, with the latest hike taking the forecast to 5-6 per cent, up from 4.5-5.5 per cent after inflation hit a 26-year high of 7.5 per cent in April from a year earlier.

Elsewhere in Asia, food and oil-related items are also driving inflation to near or above double digits.

At a briefing yesterday, Mr Karacadag said that even if oil prices stabilise there is still inflationary upside because the oil price spike in May has not been fully transmitted, food prices are still rising and there are still cost pressures on the economy.

In countries where government controls mute the pass-through of higher oil prices to retail fuel prices, inflationary expectations may worsen in anticipation of discrete price hikes, he added. The recent 25-33 per cent hike in retail fuel prices by the Indonesian government, for instance, could push annual inflation there above 12 per cent in June.

Credit Suisse has raised its inflation forecasts for most Asian countries for 2008, lifting the forecast for Singapore from 4 to 5 per cent. The hike is greatest for Vietnam - from 10.7 to 22.1 per cent.

But with central banks in the region still wrestling with growth risks in the coming quarters, they are unlikely to rapidly appreciate their currencies to combat inflation, Mr Karacadag said. The pass-through impact that exchange rate has on inflation is also generally low.

'We think that policy responses will depend on the risks to inflationary expectations and the risk of second-round effects,' Mr Karacadag said. 'If oil prices keep rising, the risk is that policy falls behind and monetary tightening has to play catch-up later.'

But monetary tightening in Singapore appears to have some impact. The Monetary Authority of Singapore said last month that if not for the appreciation of the Sing dollar - which rose about 11 per cent against the US greenback last year, and a further 4-5 per cent so far this year - Singapore's 2007 inflation rate would have been 2-2.5 points higher.

'We expect MAS to maintain the current position and slope of its policy band until the next monetary policy statement in October,' Mr Karacadag said. 'If oil prices continue to rise and inflation stay higher for longer time, I do think there is a material possibility of them either steepening the slope or re-centring the band.'

If oil and food prices do not rise further and the second-round effects are avoided, inflation is expected to fall next year and economic growth is expected pick up across Asia ex-Japan, except in Vietnam, he added