SINGAPORE: Singapore's central bank cut its forecasts for headline and core inflation this year but stuck to its tight monetary policy as expected on Tuesday, saying core inflation is likely to stay above its historical average over the next few quarters.
In a widely expected decision, the Monetary Authority of Singapore (MAS) said it will maintain its policy of allowing a "modest and gradual" appreciation of the Singapore dollar, with no changes to the slope, width or centre of the policy band.
The central bank kept its policy unchanged, even as economic growth in the third quarter came in below market expectations, with gross domestic product expanding 1.2 percent from the previous quarter on an annualised and seasonally adjusted basis.
The median forecast in a Reuters survey had been for quarter-on-quarter growth of 1.8 percent. The quarter-on-quarter reading for second-quarter GDP was revised lower, to a contraction of 0.1 percent on an annualised basis, down from 0.1 percent growth previously.
"The Singapore economy should expand at a moderate pace in the quarters ahead. Wage inflation is likely to remain relatively firm, and businesses in food-related and some services sectors could further pass on cost increases," the Monetary Authority of Singapore said in its half-yearly statement.
"Consequently, MAS core inflation is projected to stay above its historical average over the next few quarters even as CPI-All items inflation remains subdued," it added.
The MAS lowered its forecast for core inflation to an average of 2-2.5 percent in 2014, down from 2-3 percent previously, and said core inflation was likely to come in at 2 percent to 3 percent next year.
It also cut its 2014 all-items inflation forecast to 1 percent to 1.5 percent from 1.5 percent to 2.0 percent, adding that headline inflation is forecast at 0.5 percent to 1.5 percent in 2015.
The Singapore dollar briefly turned weaker after the MAS lowered its inflation forecasts, but later reversed its losses and turned higher in line with gains in other Asian currencies. It was last trading at 1.2710 versus the US dollar, up 0.1 percent on the day.
The MAS had been widely expected to maintain its tight policy of allowing a "modest and gradual" appreciation of the Singapore dollar and to keep all policy settings unchanged as core inflation has picked up.
"On the global stage, there are some uncertainties starting to crop up, like the timing of the US rate hike, and that could feed through to Singapore going forward and guide MAS towards an easing of policy. But as things stand today their stance is appropriate," said RBS economist Vaninder Singh.
An advance estimate of third-quarter GDP showed that Singapore's economy expanded 2.4 percent in July-September compared to a year ago, lower than the median market forecast for 2.8 percent growth.
"It's the construction sector where the problem was, that was the main drag on the number, the service and manufacturing numbers look good. I expect though the number will be revised higher - as we saw in the second quarter when the final month's industrial production performed well," said Singh at RBS.
The government's push to boost productivity while reducing reliance on foreign workers has led to a tight labour market and wage pressures that have helped push up core inflation. Analysts say such restructuring efforts have also weighed on economic growth, which is seen likely to slow this year compared to 2013.
While headline consumer inflation has been subdued this year due to a moderation in housing costs and car prices, core inflation, which excludes changes in the prices of cars and housing and is a focal point for MAS policy, has risen.
Singapore manages monetary policy by controlling the exchange rate, rather than borrowing costs, because trade dominates the economy. MAS lets its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.
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