Strong Singapore Dollar and Impact on Non-Imported Inflation

Mr Teo Siong Seng asked the Prime Minister whether MAS can explain how a strong Singapore dollar policy manages inflation caused mainly by domestic factors, such as rising manpower, transport and rental costs.

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Let me first put Mr Teo’s question in perspective. CPI-All Items inflation remains high at 4.2% in Q3 2012, although it has eased from 5.1% in the first six months of the year. For 2012 as a whole, it is expected to be slightly above 4.5%.

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This higher than normal inflation has been mainly due to the sharp increases in COE premiums this year, as well as in imputed housing rentals on owner-occupied homes. These imputed rentals are not cash expenditures by households; excluding this item, inflation is expected to be slightly below 4% this year.

Imputed rentals and COEs may, however, continue to add to the CPI-All Items inflation in 2013. There are also upward pressures to inflation due to two other factors. First, the labour market is expected to remain tight, and second, there has been a surge in global food prices arising from weather-related disruptions in supply, which could filter into domestic prices over the next few months. CPI-All Items inflation is thus expected to stay elevated at 3.5%-4.5% in 2013.

A strong Singapore dollar policy helps to dampen imported prices and, in so doing, also helps moderate domestic inflation. We recognise that some of the domestic cost pressures reflect supply constraints, such as the tight labour market and ceiling on COEs.

However, MAS is also alert to the risk that inflationary expectations will build up, or that households and businesses could come to expect large and volatile price increases as the norm. Thus, MAS’ monetary policy stance, including its latest October 2012 decision to continue the gradual appreciation of the Singapore dollar against a basket of currencies, has been carefully calibrated to guard against an increase in inflation expectations.

The exchange rate is not the only instrument we use in managing inflationary pressures. The Government has adopted a multi-pronged strategy, as I have elaborated earlier this year. These include specific measures to ameliorate domestic supply-side constraints and to provide help to households with their costs of living.

To help lower income households, the Government gives substantial transfers. These include subsidies for healthcare, childcare and education, as well as the GST Voucher Scheme which was introduced in this year’s Budget.

On the supply side, the Government is engaging in major initiatives in public transport, housing and productivity. Together with MAS’ exchange rate policy, these initiatives will help to contain inflation over the medium term.

We have committed to significantly expand bus and MRT capacity, so as to reduce demand for cars over time. In housing, the supply of Build-to-Order (BTO) flats has been increased significantly, as well as supply of land for private residential development. We have also taken further steps to ease pressures on housing prices by implementing another round of cooling measures in October 2012.

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However, the most important solution to the cost pressures that will arise from a permanently tight labour market is to raise productivity. We are putting much resources into helping companies raise productivity. It is the only way we can sustain growth as our domestic labour supply grows slowly, without either an increasing dependence on foreign workers or a rise in inflation over the medium term.

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