EASING IN US ECONOMY

EASING IN US ECONOMY:

(Impact on Singapore): 9.

Ms Sylvia Lim asked the Senior Minister what will be the expected impact on the Singapore economy arising from the US Federal Reserve's announcement on 3rd November 2010 of a "quantitative easing" of the US economy by US$600 billion.

10.

Mr Teo Siong Seng asked the Senior Minister if the recent decision by the US Federal Reserve to pump US$600 billion into the financial system will have any inflationary repercussions on the Singapore economy, especially in driving up our currency, stocks and property.

11.

Mr Liang Eng Hwa asked the Senior Minister (a) whether there has been a significant increase in capital inflows into the Singapore market in recent months; (b) whether the continued monetary quantitative easing in the US will lead to further capital inflows into Singapore and pose asset inflation risks; and (c) whether some form of control measures are necessary.

Mr Tharman Shanmugaratnam (for the Senior Minister Goh Chok Tong): Mr

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Speaker, Sir, if I may take the next three questions together?

Mr Speaker: Yes.

Mr Tharman Shanmugaratnam: The US Federal Reserve, or the Fed, has recently embarked on further policy measures aimed at supporting the US economic recovery and coaxing inflation back to the level that Fed policymakers consider consistent with healthy economic growth. The Fed will ease monetary conditions by purchasing longer-term US Treasury securities, amounting to some US$600 billion by mid 2011. It will do so in phases, and will adjust the amounts as economic conditions change. So this is not about US$600 billion being released into the markets all in one shot.

The Fed’s latest round of monetary policy easing is not fundamentally different from its actions in 2008 and 2009, when it purchased large amounts of securities although mainly of shorter maturities. Those actions had contributed to stabilising financial conditions in the US and globally, and supported the recovery from the crisis. The Fed hopes that its latest policy measure will lower longer term interest rates and stimulate economic activity – in particular by making housing more affordable, encouraging corporate investments and raising stock prices and consumer spending. Whether the Fed’s measure will be effective remains to be seen. But if the policy does succeed in stimulating a new cycle of growth in the US economy, or at the very least in reducing the risks of a further slowdown in the US economy, it will be positive for Singapore and most other countries in the region. The US remains one of Asia’s largest trading partners, and the state of its economy is still a key concern.

The basic reason why capital flows into Asia have increased, including into Singapore, has to do fundamentally with

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the very different stages of economic recovery being experienced in different parts of the world economy. Expansionary monetary policies in the industrialised economies, aimed at supporting their still fragile economic recovery and avoiding further escalation in financial market stresses, have led to record low interest rates. In contrast, the Asian and emerging economies generally have rebounded strongly from the crisis and have begun to tighten their macroeconomic policies. The increase in capital flows to the region reflects these underlying divergences, notably the differences in prospects for both growth and inflation between the advanced and emerging economies. Capital has flowed to this part of the world in search of higher returns.

Policymakers in the region are fully aware of the risks posed by the increased capital flows. Much of it has comprised short-term investments rather than longer term, direct investments, and can hence be volatile and easily reversed. In Singapore, the Monetary Authority of Singapore (MAS) had taken into account this volatility in global financial markets in its most recent monetary policy move in October, which involved a widening of the band in which the Singapore-dollar exchange rate can fluctuate.

The capital inflows are generally being intermediated efficiently through our domestic financial markets and banking system. Nevertheless, we are closely monitoring the impact of capital flows on the economy and especially our asset markets. We are not contemplating introducing capital controls, but will continue to rely on a range of policy tools to ensure that capital flows do not threaten financial stability or cause a property market bubble.

With our economic recovery more firmly entrenched, the Government has

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been withdrawing the expansionary macroeconomic policies implemented during the crisis. As Members know, we have also introduced a series of pre-emptive measures since September last year aimed at promoting a more stable and sustainable property market. These have had some calming effect on the market. The Government will continue to monitor the situation closely and take additional steps, if necessary, to ensure financial stability and sustainable asset markets.

Mr Liang Eng Hwa (Holland-Bukit Timah): Sir, I thank the Minister for the reassuring reply. While I understand that as an international financial centre, we do experience outflows and inflows. My further question to the Minister is whether in the midst of these in- and outflows, how much is leaked to the local markets and, hence, driving up the asset prices and Singapore dollar? Secondly, whether it is the case where the foreign capital inflows are more short term and "hot money" in nature, while the outflows which may come from local sources, are longer term in the investment horizon? Hence, the related question is what will happen if US begins to unwind its quantitative easing? Would there be a massive capital outflow and what would be the impact to Singapore and Asia?

Mr Tharman Shanmugaratnam: First, in response to Mr Liang Eng Hwa's general point about inflows of "hot money", I would say that by and large Singapore's financial system has a way of intermediating these inflows, so that what is not needed domestically tends to get recycled overseas. In fact, some of it goes back to the developed countries' market themselves, including the United States. The main reason for concern on asset markets, which is not just a short-term concern but may be with us for quite a while, is that interest rates are extremely low. And that is a function of easy monetary policies in the US and the

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developed world. Our three month deposit rates are about 0.2%-0.3%, and inter-bank rates are barely higher. So we have extremely low interest rates on deposits in the banking system, and that leads to investors, including households, wanting to search for yield somewhere else. That is the problem we have to address for some time to come. It means we have to be vigilant to the possibility of a property market bubble and take further measures when necessary. The MAS has a good handle on its prudential regulation of our banks, so that we are not really concerned, at least not fundamentally concerned about – systematic stability in our financial system. We are concerned about property prices rising too quickly and too far. Our three rounds of measures so far have been aimed and injecting some stability into that process.

Ms Sylvia Lim: Thank you, Sir. I would like the Minister to elaborate a bit on the expected effect of inflation in Singapore generally and how the Government intends to manage the risk of inflation caused by the Fed's latest move, if it is a concern.

Mr Tharman Shanmugaratnam: The main reasons for inflationary pressures picking up: first, the fact that we are growing very rapidly, the labour market is tightening and in fact most markets for resources are tightening, including commodities. There are also some food price shocks because of shortages in supply in the region, including in China. Thirdly, Ms Sylvia Lim does have a point in that easy monetary policy in the developed world has a way of leading to flows of liquidity all around the world and, sooner or later, flows of liquidity lead to more purchases of goods and services. Demand is picking up partly because the interest rates are very low, and people are looking for other things to buy, and that tends to force prices up over time. We will be on guard. MAS has its eyes very clearly centred on inflation as its principal

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objective – keeping inflation stable and relatively low in the medium term compared to the rest of the world.