VZCZCXRO6454
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #1942/01 2960147
ZNR UUUUU ZZH
R 230147Z OCT 07
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 4273
INFO RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 SINGAPORE 001942 
 
SIPDIS 
 
DEPT OF TREASURY WASHDC 
STATE PASS TREASURY SSEARLS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EFIN EINV SN
 
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 
growth. 
 
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 
Comment. 
 
HERBOLD