Be ‘Nimble’ In Uncertain Times

Source : TODAY, Weekend, April 5, 2008

Inflation may not yet have peaked, warns Finance Minister

Singapore’s inflation rate, already at a 26-year high, may not have peaked and policy-makers must be ready to respond to unexpected economic developments, Finance Minister Tharman Shanmugaratnam said on Friday

“It’s too early to say that inflation has peaked,” Mr Shanmugaratnam told reporters at a meeting of finance ministers from the Association of South-east Asian Nations (Asean) in Vietnam.

“We want to watch the situation carefully and be nimble in our overall economic strategy.”

Singapore’s consumer prices rose 6.6 per cent from a year earlier in January, the fastest rate since 1982, as costs of food and energy soared.

OCBC economist Selena Ling told Today she expected year-on-year inflation to hit 7 per cent within one to three months.

“In the next few months and quarters, things like airline surcharges and electricity tariffs will creep in. Food is a medium-term structural issue, so it is not going to go away overnight,” she said.

“A lot of Asian countries are imposing export limits and obviously we are going to feel the impact of food prices going higher.”

“The Government’s point is that there will be continued supply but we must be prepared to pay more.”

UOB economist Ho Woei Chen is more sanguine, expecting inflation to average 5.2 per cent this year, comprising a first-half average of 6.4 per cent and a second-half average of 4 per cent.

Mr Shanmugaratnam’s comments came less than a week before the Monetary Authority of Singapore’s semi-annual policy statement. In its last policy statement issued in October, it projected inflation of 3.5 per cent for the first half of this year and between 2 and 3 per cent for the second half.

The central bank faces conflicting needs, as inflation remains high and difficult to predict even as export-dependent Singapore is vulnerable to the weakness in the United States economy.

“The possibility of a deeper recession in the US and a more prolonged one is something that every prudent policy-maker should not rule out,” said the Finance Minister. “There is great uncertainty about how the credit cycle will evolve and what its impact will be on the real economy.”

However, Mr Shanmugaratnam said the likelihood of a US recession had already been factored into the Government’s economic growth forecasts. The Singapore economy is expected to grow between 4 and 6 per cent this year, slower than the 7.7-per-cent expansion recorded last year. The Government will issue an advance estimate for first-quarter economic growth next week.

“We will have to expect some slowdown in the second quarter and going beyond the second quarter in Singapore,” Mr Shanmugaratnam said.

On the expected slowdown, UOB’s Ms Ho said: “Even if there is a slight negative growth in the US in the first quarter, it’s not going to be very bad. The US government’s stimulus policy and fiscal spending will work through the system in the second half of this year.

“The Asian economies seem to be holding up quite well.”