SINGAPORE, July 23: Singapore’s central bank lowered its inflation outlook for the year on Tuesday but said it was concerned about household debt levels as interest rates looked set to rise.
The Monetary Authority of Singapore (MAS) revised downwards its inflation forecast for 2013 to 2-3 percent from an earlier 3-4 percent, citing the sharp fall in car prices earlier this year as well as a slower rise in accommodation costs.
Economic growth this year will ‘comfortably’ meet the official forecast of 1-3 percent, the central bank added, citing the strengthening U.S. Economy and Japan’s expansionary policies that will likely offset headwinds from a slowdown in China and easing public spending in some Southeast Asian countries.
‘For the first time in three years, CPI inflation has come down closer to historical trends and within MAS’s comfort range,’ MAS managing director Ravi Menon said during a press briefing for the release of the central bank’s annual report.
But MAS warned that core inflation — which excludes cars and accommodation since these were more influenced by government policies — could rise ‘moderately’ to 2 percent or slightly higher in the latter half of 2013 due to continuing tightness in the labour market.
Headline inflation averaged 2.8 percent for the first half of 2013, data showed.
MAS was committed to ensuring that the recent improvements in inflation were sustained and the ‘current policy stance of modest appreciation of the Sing dollar is appropriate in containing re-emergence of strong cost and price pressures in a restructuring economy,’ Menon said.
Singapore’s economy grew by just 1.3 percent in 2012 while headline inflation was 4.6 percent.
The central bank, however, expressed concerns about rising household debt in the city-state and said an estimated 5-10 percent of borrowers had ‘probably over-leveraged on their property purchases’ based on their total debt service payment ratio of more than 60 percent of monthly income.
‘If mortgage rates were to rise by 3 percentage points, the proportion of borrowers at risk could reach 10-15 percent,’ Menon said.
Menon said household balance sheets in Singapore were resilient at an aggregate level, with cash and deposits exceeding debt, but the healthy balance sheets were not uniform across households.
Banks in Singapore now offer housing loans at around 1.1 to 1.2 percent per annum, well below the 3.5 percent level that financial institutions must use when calculating debt servicing ratios of potential borrowers based on the latest central bank requirements.
FX LOSSES HIT BOTTOM LINE
MAS on Tuesday also posted a net loss of S$10.61 billion ($8.39 billion) for its last fiscal year ended March 2013 as the local dollar’s gains against the yen and euro diminished the value of its foreign currency holdings.
The loss, its second in three years, was just slightly below the record S$10.9 billion deficit incurred in financial year 2010/11 when the Singapore dollar also soared.
MAS made a net profit of S$2.77 billion in FY2011/12.
‘We made good investment returns, but when measured in Singapore dollars these gains were more than offset by the strength of the currency,’ Menon said.
The Singapore dollar gained 13.8 percent against the yen and 6.2 percent against the euro in the 12 months to March, the MAS said. During the same period, the Singapore dollar rose 5.1 percent versus the British pound and 1.3 percent against the dollar.
The central bank had total assets of S$340.4 billion as at end-March 2013, up from S$319.2 billion at the end of the previous financial year.
Assets held by MAS are mainly for managing the Singapore dollar’s value against a basket of currencies and to defend the local unit when required. The task of ensuring the country earns adequate returns on its massive foreign exchange reserves lies with GIC, formerly known as the Government of Singapore Investment Corp, which has an estimated $300 billion.
($1 = 1.2649 Singapore dollars)
(AGENCIES)
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