More direct measures may have to be used to rein in price pressures
[SINGAPORE] Singapore may be fighting inflation by tightening monetary policy, but the outcome of this isn’t so straightforward. What this means is that policy makers may have to resort to more direct measures to rein in price pressures if these continue unabated.
In its latest review earlier this month, the Monetary Authority of Singapore (MAS) announced that it would let the Singapore dollar appreciate at a faster pace – to make imports cheaper and keep inflation in check. The central bank increased the slope of the exchange rate policy band slightly while narrowing the band.
But a strong Singapore dollar, together with ultra-low interest rates in the United States, could draw more funds here in search of better returns. The excess liquidity could depress domestic interest rates further – at least in theory. And lower borrowing costs may sustain strong domestic demand and push prices of big ticket items from property to cars further up.
April’s tightening “is likely to impute downward pressure on domestic short-term interest rates”, said Citigroup economist Kit Wei Zheng in a recent report. “With the bulk of mortgages pegged to Sibor (Singapore Interbank Offered Rate) and/or SOR (Swap Offer Rate) fixings, the stimulatory effect on property demand could be met with further cooling measures, especially if home sales continue at the breakneck pace of Q1.”
As the MAS manages the exchange rate in an open capital regime, it has to cede control of interest rates, allowing the latter to track rates globally. US rates have a considerable influence – the three month Singapore-dollar Sibor has historically moved closely with the three month US-dollar Libor.
The US Federal Open Market Committee decided last week to keep interest rates near zero. “US interest rates including the federal funds rate are expected to be quite low till late 2014,” said Aurobindo Ghosh, programme director at Singapore Management University’s Sim Kee Boon Institute for Financial Economics. “Following that, interest rates like Sibor or SOR are expected to be low as well due to capital mobility.”
This, coupled with the expected strength of the Singapore dollar, could keep interest rates here low as well. “Faster currency appreciation makes Singapore even more attractive to foreign investors than it is already. Other things being equal, inflows go up and interest rates go down,” said DBS group research managing director David Carbon. “That raises demand for interest-rate sensitive goods like property and autos.”
Certainly, there are other factors in the mix, and so far, the impact of the latest MAS move has not been pronounced. Since MAS announced its monetary policy decision, the three-month Singapore-dollar Sibor has dipped less than 0.01 per cent to 0.382 per cent last Friday, while the three-month Singapore-dollar SOR has risen slightly to 0.344 per cent.
The 3-month Sibor and SOR have traded mostly sideways since the announcement as markets remained unsettled over tail risks, including the fallout from the eurozone debt crisis, noted OCBC economist Selena Ling.
Also, the Singapore dollar appreciation story is less straightforward at this point with Singapore’s GDP growth forecast at just 1-3 per cent this year, she said. “Fund inflows into Asia have pulled back sharply for both the equity and bond markets, which signals generally decreasing investor confidence, especially with the ongoing Chinese growth slowdown.”
Several economists pointed out as well that narrowing the exchange rate policy band also prevents the Singapore dollar from rising too sharply.
Still, expectations are for MAS’s tightening moves to contribute to low or lower domestic interest rates, with implications for domestic demand.
Prices in some property sectors are still climbing. In the first quarter, private home prices in the Outside Central Region – where mass-market condominiums are – rose 1.1 per cent from the previous quarter. Prices of industrial space jumped 7.3 per cent. In the car market, the tight supply of certificates of entitlement (COEs) and the resulting surge in COE premiums have led to soaring car prices. Yet, the appetite for wheels remain, partly sustained by low interest rates for car loans.
What monetary policy cannot target, other measures will have to kick in, economists say.
“In adopting the exchange rate mechanism, we have given up interest rate autonomy. That leaves us to conclude that macroprudential and sector-specific measures are perhaps best suited for tackling risks associated with property prices,” said Mizuho economist Vishnu Varathan.
Barclays Capital economist Leong Wai Ho noted that existing curbs on property speculation are already strong dampeners and have helped offset the effect of low borrowing costs.
If property prices and transaction volumes resume their uptrend, there could be additional curbs, he said. “These are likely to be extensions of current prudential measures, such as a further increase in the rate of the additional buyer’s stamp duty (ABSD), or tougher measures to prevent developers from offering cash rebates to foreign buyers that offset the ABSD.”
Rising car prices are feeding directly into headline inflation figures. But the supply of COEs is set to remain tight as the government seeks to rein in vehicle population growth. Some market watchers have suggested instead that car loan rules be tightened. Buyers can take up car loans of up to 100 per cent of the purchase price today, but they may think twice if a sizeable down payment is needed.
Heightened domestic inflation risks make it even more important to keep imported inflation at bay, say policy watchers.
“I believe there is scope for monetary policy to be tightened further on an incremental basis, if global energy prices remain elevated for longer, if external demand should re-accelerate, or if we see more generalised increases in services costs in the economy,” Mr Leong said.
“When you are in the midst of a painful domestic cost adjustment (higher COEs and higher wages), it makes sense to keep your guard up to prevent additional imported price pressures from filtering through into the economy.”
Source: Business Times 30 April 2012