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Singapore Signals Policy Tightening Won’t Fully Offset Prices

April 30 (Bloomberg) -- The tightening of Singapore’s monetary policy earlier this month won’t completely counter price pressures, as efforts to reduce foreign workers in the economy push up business costs, the central bank signaled.

“While changes in the foreign worker policy are necessary to ensure a more efficient allocation of resources and a more productive workforce over the medium term, the latter will take time to come to fruition,” the Monetary Authority of Singapore said in its Macroeconomic Review today. The policy tightening is “intended to temper, but not fully offset, the pass-through of these supply-side cost increases,” it said.

The central bank, which uses the exchange rate to manage inflation, said April 13 it would allow faster currency appreciation as a report showed the island’s economy rebounded in the first quarter. Price gains will probably remain elevated amid “modest” growth in the coming quarters as the tourism and financial industries counter “sluggish” trade-related businesses such as those in electronics, the MAS said in today’s report.

Gross domestic product will probably increase 1 percent to 3 percent this year, the central bank said, reiterating earlier forecasts. Employment may grow at a slower pace in 2012 even as local wages may climb at a “healthy” rate, it said.

The weakness in the global information technology industry last year has hurt Singapore’s electronics producers, and the chemicals industry may experience “restrained” growth because of capacity expansions in Asia and the Middle East, the central bank said. Pharmaceutical companies may “see more measured growth this year, on the back of the ongoing consolidation in the global pharmaceutical market,” it said.

Wages Rising

“While prospects for the manufacturing-linked industries are uncertain, the non trade-related service sectors will remain buoyant and supportive of GDP growth in 2012, on the back of strong regional and domestic fundamentals,” according to the report. “With local wages expected to still increase at a healthy pace this year, retail sales and other domestic-oriented services should continue to record steady expansions.”

Expansion in the construction industry will be supported by a ramp-up in contracts awarded over the past two years, the central bank said.

The labor market will remain “tight” because of supply constraints, it said, citing further tightening of the foreign labor policy and signs that hiring sentiment is gradually improving with the more positive economic outlook.

Singapore’s consumer price index rose 5.2 percent in March from a year earlier. Core inflation was 2.9 percent. The central bank today reiterated its forecast for inflation of 3.5 percent to 4.5 percent this year, and core price gains of 2.5 percent to 3 percent.

Cost Pressures

“The strong consumer price increases in early 2012 were the result of the pass-through of cost pressures accumulated over the previous two years,” it said. “While the pace of subsequent price increases will ease from the high seen earlier this year, overall inflation will remain firm.”

Imported inflationary pressures are likely to be sustained by the rise in global oil prices, the central bank said.

Other imported prices may “stay benign before picking up moderately towards the end of the year when the global economic recovery is expected to be stronger,” it said.

To contact the reporter on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net

To contact the editor responsible for this story: Linus Chua in Singapore at lchua@bloomberg.net

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