SINGAPORE Singapore's central bank stuck to its tight monetary policy stance on Monday despite weaker growth in the first quarter, saying core inflation will remain elevated as a sustained recovery in advanced economies spurs a rebound in the city-state.
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's latest statement on policy came as an advance estimate of first-quarter gross domestic product (GDP) showed that Singapore's economy grew a tepid 0.1 percent in the first quarter from the previous quarter on a seasonally adjusted, annualized basis.
That matched the median forecast in a Reuters survey and marked a sharp slowdown from 6.1 percent growth in the fourth quarter of 2013, hurt by contraction in the services sector and weakness in manufacturing.
However, growth in the city state's economy is expected to rebound on the back of an ongoing recovery in the United States and Europe, MAS said, noting that a stretched labor market and underlying core inflation pressures justified the tight monetary policy settings.
"Barring a significant shock in the external environment, the Singapore economy should expand at a moderate pace over the course of the year. Wage pressures will persist and firms are likely to pass on business costs to consumer prices. Consequently, MAS Core Inflation is expected to stay elevated," the central bank said in its half-yearly statement.
"MAS will therefore maintain its policy of a modest and gradual appreciation of the S$NEER policy band," the MAS said.
The MAS trimmed its forecast for headline inflation in 2014 to 1.5-2.5 percent, down from 2-3 percent previously, but kept its forecast for core inflation, which excludes the changes in the prices of cars and accommodation, unchanged at 2-3 percent.
"The fact that we've seen the headline inflation forecast come off, I don't think it's too much of a surprise. It's important to note that core inflation was kept the same," said Daniel Wilson, an economist for ANZ.
"The fact that core is still the same signals that inflation pressure is still on their mind," he added.
The Singapore dollar eased, both in reaction to the lower headline inflation forecast and broad strength in the U.S. dollar. It was last trading down 0.2 percent at 1.2512 versus the greenback.
Commenting on its outlook for headline inflation, the MAS said imputed rentals on owner-occupied accommodation are expected to stabilize and the impact of car prices on inflation will be negligible for the whole of 2014.
Core inflation is expected to quicken in coming months, the MAS said, adding that the labor market is likely to remain stretched. The tight conditions in Singapore's labor market are partly a result of the government's efforts to boost productivity and reduce reliance on foreign labor.
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.
GROWTH SLOWS IN Q1
The central bank's apparent lack of concern over the weak first quarter growth numbers was underscored in its optimistic take on the outlook, especially with Singapore's key markets of the United States set for solid growth and Europe steadily coming off a recession.
The government is forecasting the economy to grow an annual 2-4 percent in 2014, from 4.1 percent in 2013.
"The Singapore economy is expected to grow at a moderate pace in 2014, supported by the cyclical uplift in the industrialized economies," the MAS said, adding that growth in the West should help to overcome the weakness in Asia's economic powerhouse, China.
China was the top destination for Singapore's non-oil domestic exports in 2013, with a 14 percent share, followed by the European Union with 11.5 percent and the United States at 9.3 percent.
The MAS said growth in the first quarter was hit by soft manufacturing and trade-related activities as adverse weather conditions in the United States dented demand for Singapore's exports.
In addition, the financial services industry grew at a slower pace as sentiment in global markets was dampened by the U.S. Federal Reserve's tapering of its monetary stimulus, it added.
The city state's economy expanded 5.1 percent from a year ago, the government said, matching market expectations and down slightly from a 5.5 percent growth in the fourth quarter.
(Additional reporting by Andrew Toh; Editing by Shri Navaratnam)