Singapore's Longer-term Inflation Expectations

Mr Speaker, Sir, available measures indicate that Singapore’s longer-term inflation expectations remain well anchored. The five-year ahead inflation forecasts of economists and professional forecasters have been broadly unchanged over the past two years. While households’ longer-term inflation expectations picked up in late-2021 to early-2022 alongside the rise in global and domestic inflation, the latest survey from December showed that expectations have fallen to close to their historical levels.

The stabilisation of households’ longer-term inflation expectations occurred alongside a similar outturn in actual inflation in late 2022. Year-on-year, the Monetary Authority of Singapore (MAS) Core Inflation remained unchanged at 5.1% in the fourth quarter of 2022 compared to the third quarter, after rising continuously since the first quarter of 2021. On a month-on-month basis, the pace of increase in core prices has trended down over the second half of 2022.

MAS, like other central banks, will continue to focus on stabilising near-term inflation and price expectations, as these weigh heavily in the formation of longer-term inflation expectations.

As the Member observed, multiple factors will influence the path of global, regional, and domestic inflation over the longer term. These include, for instance, demographics, technological advances that impact productivity, future trends in globalisation and central banks’ commitments to ensure low and stable inflation in their economies. These factors can potentially boost or dampen inflation. There is therefore uncertainty and a significant diversity of views among central bankers, academics and analysts on the likely inflation trends in the long term.

I would like to reassure Members that MAS is closely monitoring and assessing these developments, and is unwavering in its objective of securing price stability for sustainable growth.

Thank you, Mr Speaker. I would like to thank the Minister of State for his answer to my question. I have two supplementary questions. My first is in regard to the assessment of the long-term inflation by MAS and the Government. How often would MAS or the Government assess the long-term inflation estimates, taking into consideration the changes in dynamics in commodity prices, global shifts and inflation dynamics?

The second question is related to what has happened overnight and things that have happened in the financial sector globally. How does financial stability play a part in our exchange rate policy considerations and also long-term inflation? If the Minister of State can also briefly share about the latest developments on financial stability, given overnight happenings, what impact do those have on inflation and Singapore's financial sector as well?

Sir, I thank the Member for his supplementary questions. The longer-term inflation expectations are proxied by five-year ahead forecasts for inflation, both looking at professional forecasters as well as household expectations. The household expectations survey, the DBS-SKBI SInDEx (Singapore Index of Inflation Expectations) Survey, as I mentioned, has shown that five-year ahead inflation forecasts have stabilised over the June and September surveys, and fell in the latest survey in December. So, it is a mixture of both professional forecasters as well as household expectations.

With regard to the Member's second supplementary question, I will frame the context in terms of how that would be impacted by or affecting longer-term inflation. As Members know, MAS' monetary policy is medium-term focused to achieve low and stable inflation as the basis for Singapore's economic growth. MAS has tightened monetary policy since October 2021 and will continue to closely monitor global and domestic economic developments in the run-up to the scheduled policy review in April 2023, where it will take into account the implications for inflation as well as growth.

By themselves, near-term shocks such as the recent developments in the international banking industry would not have direct implications for the long-term path of inflation and the Singapore Dollar Nominal Effective Exchange Rate (S$NEER). As I mentioned in my earlier response, these depend on longer-term structural factors such as demographics, technology advances that impact productivity as well as future trends in globalisation.

But as the Member also observed, there have been developments overnight and earlier this morning, and I would like to point Members to the statement that MAS had issued this morning and other statements related to developments in the international banking sector on 16 March 2023 as well as 13 March 2023.

Allow me to make a few quick points. First, Credit Suisse Group AG will continue operating in Singapore with no interruptions or restrictions following the announced takeover by UBS Group AG or UBS. Customers of Credit Suisse will continue to have full access to their accounts and Credit Suisse's contracts with counterparties remain in force.

The takeover is not expected to have an impact on the stability of Singapore's banking system.

Second, Singapore's banking system remains sound and resilient. The Singapore dollar money market and foreign exchange market continue to function well. The Singapore banking system has insignificant exposures to the failed banks in the US and Singapore banks have confirmed that exposure to Credit Suisse is insignificant. Banks in Singapore are well-capitalised and conduct regular stress tests against credit and other risks. Their liquidity positions are healthy, underpinned by a stable and diversified funding base.

MAS will continue to closely monitor the domestic financial system and international developments and stands ready to provide the liquidity through its suite of facilities to ensure that Singapore's financial system remains stable and financial markets continue to function in an orderly manner.

Just a quick follow-up on the question about inflation expectations. I wonder if the Minister of State can elaborate on whether MAS has observed any evidence of inflation pressures actually passing through to wages, in particular? And if so, what kind of mitigation mechanisms does the MAS have in terms of dealing with the possibility that this could become more entrenched?

I thank the Member for his supplementary question. As MAS has also communicated, MAS Core Inflation is expected to ease more discernibly over the second half of 2023. This reflects a combination of base effects and also moderating external and domestic labour cost pressures. What does this entail? It actually suggests that longer-term inflation expectations are unlikely to persistently increase. Of course, we are looking at this and monitoring this very closely.

But more broadly, wages in Singapore are not tightly indexed to inflation. Over the years, our tripartite wage-setting institutions have ensured that wage outcomes remain in line with productivity growth. For these reasons, we assess that the risk of a wage-price spiral remains contained at this point. But we will closely monitor developments as they go.