Government's Target Inflation Range

Ms Tan Su Shan asked the Minister for Trade and Industry (a) whether the Government has a target inflation range; (b) if so, does it differentiate between domestic and imported inflation pressures; (c) whether a strong Singapore dollar policy leading to domestic inflation pressures is a concern; and (d) what is being done on the supply side to ease these pressures.

Mr Lim Hng Kiang: Mr Speaker, Sir, Singapore's monetary policy is centred on managing the exchange rate of the Singapore dollar. This makes sense given the small and open nature of our economy. Our exports and imports of goods and services are nearly four times as large as our GDP. The exchange rate therefore has a significant influence on domestic prices, and plays an important role in determining economic activity. While MAS does not have a formal inflation target, the MAS Act clearly states that MAS' objective is to maintain price stability for sustained economic growth over the medium term.

MAS and MTI do differentiate between domestic and imported inflation. We keep close watch on consumer price developments from both sources. First, imported inflation from abroad. The prices of goods we import from other countries, for instance, food and oil, can change significantly due to events beyond our control, such as poor harvests, natural disasters, or geopolitical tensions. Second, there are domestic sources of inflation stemming from changes in the cost of factor inputs. For example, when the cost of hiring a worker goes up, businesses may charge higher prices for goods and services to maintain their profit margins.

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A stronger Singapore dollar helps to cap both imported as well as domestic inflation. As the majority of products we consume and use in production are imported from overseas, a stronger exchange rate will reduce the Singapore dollar cost of these imported goods for both consumers and producers. Moreover, a stronger Singapore dollar will help to moderate domestic inflation by dampening the external demand for our goods and services, in turn lowering the demand for domestic resources, such as labour and land. As a result, rentals and wages would rise more modestly, reducing Singaporeans' demand for goods and services. This is similar to how interest rates impact domestic prices in larger economies.

Apart from consumer prices, Singaporeans have also been concerned about asset prices. The increase in asset prices is due to strong demand and tight supply of completed units. The low domestic interest rates, which follow global rates because of our open financial system, have also partly supported the demand. We have implemented fiscal and prudential measures to cool the property market. Where supply constraints can be ameliorated to relieve cost pressures in the housing, commercial and industrial property segments, we have also done so directly.

In addition, the Government is partnering Singapore workers and companies to raise productivity. Firms are in a challenging environment, where foreign worker levy and other costs are impacting their bottom line in the short term. Higher productivity allows firms to pay higher wages while remaining profitable without relying on large price increases. There are already several schemes for firms investing in machines that enhance productivity and innovation as well as to encourage further training and up-skilling of our workers.

These supply side measures from increasing the availability of property supply to enhancing productivity will help us manage domestic inflation over the longer term.

Finally, the Government also provides cash grants directly to help mitigate the impact of rising costs on households. For example, the "Grow & Share" package and the U-Save rebates. Last year alone, resident households living in HDB 3-room flats received Government transfers worth more than $2,000 per person on average. This amounts to around 10% of household income per household member. For resident households living in HDB 4-room flats, the transfer was around 7% of their average household income per household member. Although these grants do not reduce inflation, they help to offset the higher cost of living that our households experienced.

Ms Tan Su Shan (Nominated Member): Thank you, Minister, for the good explanation. The recent Budget has obviously led to transition costs. My fear has been that with the inflation rate now catching up with the GDP growth numbers, at some point, are we worried that the inflation rate will take to overtake our growth numbers? I cite today's Business Times report, headlined "All eyes on Sing$ as price pressure rises. Stubborn inflation and expectations of rising prices can feed into jobs and wages". This is clearly a concern. The second is, yes, I agree a strong Sing dollar helps with an open economy like ours to mitigate imported inflation. However, I do wish to comment that a strong Sing dollar policy may necessarily mean that our forward rates will also remain low. A low forward rate may lead to a rise in money supply which could also lead to asset inflation, which the Minister rightly pointed out. Those two are potential concerns that I want to raise now.

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Mr Lim Hng Kiang: I thank the Member for stating the complex challenge that MAS faces. It is obviously true that the inflation rate has been more persistent. We have been stuck with headline inflation at just below 5% for quite a long time. And MAS' core inflation has also been stuck at 3% for a long time. This is something which MAS is very concerned about. As Members know, the monetary policy statement will be issued this Friday. So these are some of the factors that MAS will take into consideration. The other point about the very liquid international situation which partly causes the asset inflation that we face is with us for some time to come. And this is also part of a very complex environment that MAS has to deal with in managing its monetary policy.