Cablegate: Singapore Moves to Fight Inflation

DE RUEHGP #1942/01 2960147
R 230147Z OCT 07





E.O. 12958: N/A

SUBJECT: Singapore Moves to Fight Inflation

1. (U) Summary. After a summer surge in prices, the Monetary
Authority of Singapore (MAS) finally moved to combat the
island's inflationary spike. MAS hopes that by accelerating the
appreciation of the currency, it will be able to bring inflation
back within its long term target range of below 2 percent.
Analysts were surprised at the change in currency policy, but
remain somewhat concerned that the measure may not go far enough
to slow price increases in non-tradable goods and services such
as property. End summary.

Inflation at 13-year High

2. (U) MAS acknowledged the increased upward pressures on
inflation in its twice annual statement on October 10.
Inflation has accelerated from 0.8 percent on a year-on-year
basis in the first half of 2007 to 2.8 percent year-on-year in
the July-August period -- its highest level in more than 13
years (see Table 1). Half of this acceleration could be
attributed to July's one-off hike in the goods and services tax
(i.e. value added tax), according to MAS. The rest came from
robust economic growth, low unemployment, severe shortages in
commercial, office and residential space, and large jumps in
asset prices. MAS expects inflation to come in at 1.5-2.0
percent in 2007 and 2.0-3.0 percent in 2008. Based on the
hawkish tone of the monetary policy statement, concerns about
inflation appear now to be MAS's focus rather than economic

Table 1. Singapore's Inflation
Consumer Percentage Change
Price Index Year-on-year
1997 96.2 2.0
1998 95.9 -0.3
1999 96.0 0.0
2000 97.2 1.3
2001 98.2 1.0
2002 97.8 -0.4
2003 98.3 0.5
2004 100.0 1.7
2005 100.4 0.5
2006 101.4 0.5
January 07 101.3 0.2
February 07 101.9 0.6
March 07 101.7 0.7
April 07 102.1 0.6
May 07 102.4 1.0
June 07 102.0 1.3
July 07 104.1 2.6
August 07 104.5 2.9
Source: Singapore Statistics

Unique Monetary Policy Instruments

3. (U) As a small, open economy, Singapore operates on the
premise that most inflation will be imported from overseas. As
such, MAS uses the exchange rate as its primary tool to fight
inflation, rather than the interest rate as in most countries.
Technically, MAS does this by intervening in the foreign
exchange market to keep the exchange rate within an undisclosed
band verses a trade-weighted average nominal exchange rate,
known as the Singapore dollar nominal effective exchange rate
(S$NEER). MAS does not disclose either the exact weights of the
currencies used in the S$NEER or the width or slope of the band
of allowable changes for the Singapore dollar versus the S$NEER.
MAS uses its twice annual policy statements to describe the
general trend of its currency policy and any changes it intends
to make to the intervention band.

New Policy Tightens Monetary Policy

4. (U) MAS's October 10 policy statement did not change its
general characterization of its currency policy: it maintained
"the gradual and modest appreciation of the Singapore dollar
nominal effective exchange rate (S$NEER)." However, MAS
surprised the market by announcing it would increase "slightly
the slope of the S$NEER policy band." The change in the slope
of the intervention band suggests greater scope for the
Singapore dollar to rise in the future. Singapore, therefore,
is tightening its monetary policy to combat inflation.

2. (U) Market analysts expect this change to translate into 2
to 3 percent annual appreciation of the S$NEER compared to

SINGAPORE 00001942 002 OF 002

previous estimate of 1.5 to 2.5 percent. This should bring the
exchange rate to S$1.46-1.47 per U.S. dollar in 2007, and to
S$1.39-1.44 per U.S. dollar in 2008. Nevertheless, some market
analysts expect the effect of this tighter monetary policy bias
to be limited in the near term. In addition to further fine
tuning of its monetary policy, MAS may also require non-monetary
policy measures in 2008 to contain inflationary pressures.

Comment: Will It Be Enough?

3. (U) While MAS surprised the market by changing its currency
policy, it remains to be seen if this minor adjustment will be
enough to rein in inflation. The high rate of inflation in non-
tradable goods (such as rents and services) raises the
possibility that the exchange rate will be less effective than
in the past at slowing Singapore's overall inflation. End


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