The Monetary Authority of Singapore (MAS), which targets the Singapore dollar against a basket of undisclosed foreign currencies rather than inflation, said the country's economy should expand modestly in 2013 with a tight labor market exerting some upward pressure on core inflation in the latter half of this year as higher wage costs are passed through to consumers.
In 2013 Singapore's Gross Domestic Product is expected to expand by 1-3 percent, with growth gradually improving during the year on the back of a recovery in external demand.
Consumer price inflation is forecast at 3-4 percent with average core inflation forecast at 1.5-2.5 percent, but rising moderately in the second half of the year through "persistent tightness in the labour market."
Singapore's GDP shrank by 1.4 percent in the first quarter of 2013 from the fourth quarter, according estimates by the Ministry of Trade and Industry, following a quarterly rise of 3.3 percent in the fourth quarter.
Singapore's core inflation rate, which excludes private road transport and accommodation costs, eased to an annual rate of 1.5 percent in January-February from 2.0 percent in the fourth quarter and 2.4 percent in the third quarter of 2012, the MAS said, helped by favourable supply conditions in commodity markets and the impact of the currency's appreciation.
During the same period, the all-items inflation rate averaged 4.0 percent.
For 2013, MAS is lowering its core inflation forecast to 1.5-2.5 percent from a previous forecast of 2.0-3.0 percent due to lower-than-expected price rises over the past few months, it said.
The all-items inflation rate is forecast at 3-4 percent, down from a previous forecast of 3.5-4.5 percent.
"The outlook for the world economy has improved since late last year, although uncertainties remain, particularly with regard to Europe," MAS said, with economic recovery underpinned by the gradual pickup in the U.S. housing market and private demand, as well as fiscal stimulus in Japan.
Economic activity in China should be sustained on the back of robust domestic demand and the rest of Asia will see continued moderate growth, giving a modest lift to the global IT industry following a contraction in 2012.
Singapore's manufacturing sector and export-oriented industries should improve gradually over the year with the economy's level of output converging to its underlying potential and the labour market remaining a full employment, partially reflecting supply-side constraints, it said.
MAS, which previously issued a monetary policy statement in October 2012, said the Singapore dollar's nominal effective exchange rate (S$NEER) had fluctuated in the upper half of its policy band over the last six months with the broad-based decline in the Japanese yen leading to upward pressure.
But this was countered by "bouts of domestic currency weakness" due to a strengthening of the U.S. dollar on speculation over an early exit from quantitative easing by the Federal Reserve and renewed uncertainty over the European debt crises, MAS said.
Economists had expected the MAS to hold its policy stance steady.
The MAS adjusts the rate of appreciation of the Singapore dollar against a basket of currencies by changing the slope, width and center of the trading band.