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MAS monitoring Inflation
Posted by Economics Corner
on
4:55 AM
Monetary Authority of Singapore closely monitoring property prices, inflation to stay tame
Inflation continues to be a key concern for MAS. It noted that business costs like wages and rentals have risen rapidly recently. CPI is expected to pick up in the second half, with the GST hike in July and some price increases in food and transport. The central bank expects CPI for the full year to come in at the upper end of its forecast range of 0.5-1.5%. It foresees inflation creeping up by 1-2% next year.
It's also keeping a close eye on rising property prices. "Impact of the rise in property prices and CPI - the first round effect is small. We'll watch the second round, to see if high prices will pass through to inflation as rental costs get passed on into prices of goods and services. On the financial stability front, the banking sector's exposure to property and construction sectors, as well as housing loans, is significant," said Heng Swee Keat, MD of MAS.
The central bank is maintaining its policy of allowing a modest and gradual appreciation of the Singapore dollar. The Singapore dollar is now hovering at 10-year highs against the greenback.
Source: Channel News Asia, 25th July 2007 (Extracted)
1a) Identify and explain the cause of inflation mentioned in the news article.
· Cost push inflation
· Cost of production has increased as the article mentioned that such as labour cost (wages) and rentals have increased
· The increase in GST would also cause tax push inflation as it raise the cost of living.
· Producer will increase prices to maintain profit.
· Increase in prices results in inflation.
b) Briefly explain what the Consumer Price Index (CPI) is.
· The CPI shows the general increase in the price level.
· The prices of a basket of goods are measured.
· The prices of the basket of goods in the current year are then compared to that of the base year.
c) (i) Explain what is meant by the ‘appreciation of the Singapore dollar”.
· The increase in the value of the Singapore dollar.
· Against other currencies such as the US Dollar.
(c) (ii) Discuss two impacts on Singapore that will arise from an appreciation of exchange rates.
· When S$ appreciates, prices of exports increase in overseas markets.
· If demand is elastic then foreign currency earnings will fall.
· This will lead to a smaller BOP surplus. Reverse for inelastic demand.
· When S$ appreciates, quantity demanded for S$ increases.
· This cause the BOP surplus to become bigger.
· Only if demand is inelastic will there be no change in foreign exchange expenditure.
· In the long run, the demand for Singapore exports will decrease and demand for the cheaper imported goods will increase. This will then lead to worsening of balance of payments.
· It will increase purchasing power of residents abroad e.g. real estate purchasing.
· Reliance on importer goods which are cheaper. Local industry is adversely affected .
d) Explain the roles of the central bank (MAS) as mentioned in the news article.
· One of its role is shown by the phrase “maintaining a gradual appreciation of the S$”
· it will intervene to prevent excessive fluctuation of S$ exchange rate
· MAS use the exchange rate as the main tool of monetary policy.
· It is “keeping an eye on the rise of property prices” because If the prices of goods and services are distorted by inflation, then there will not be clear signs and guides to efficient allocation of resources.
· Inflation will also discourage saving and investment as the value of assets can be eroded by unexpected inflation.
Inflation continues to be a key concern for MAS. It noted that business costs like wages and rentals have risen rapidly recently. CPI is expected to pick up in the second half, with the GST hike in July and some price increases in food and transport. The central bank expects CPI for the full year to come in at the upper end of its forecast range of 0.5-1.5%. It foresees inflation creeping up by 1-2% next year.
It's also keeping a close eye on rising property prices. "Impact of the rise in property prices and CPI - the first round effect is small. We'll watch the second round, to see if high prices will pass through to inflation as rental costs get passed on into prices of goods and services. On the financial stability front, the banking sector's exposure to property and construction sectors, as well as housing loans, is significant," said Heng Swee Keat, MD of MAS.
The central bank is maintaining its policy of allowing a modest and gradual appreciation of the Singapore dollar. The Singapore dollar is now hovering at 10-year highs against the greenback.
Source: Channel News Asia, 25th July 2007 (Extracted)
1a) Identify and explain the cause of inflation mentioned in the news article.
· Cost push inflation
· Cost of production has increased as the article mentioned that such as labour cost (wages) and rentals have increased
· The increase in GST would also cause tax push inflation as it raise the cost of living.
· Producer will increase prices to maintain profit.
· Increase in prices results in inflation.
b) Briefly explain what the Consumer Price Index (CPI) is.
· The CPI shows the general increase in the price level.
· The prices of a basket of goods are measured.
· The prices of the basket of goods in the current year are then compared to that of the base year.
c) (i) Explain what is meant by the ‘appreciation of the Singapore dollar”.
· The increase in the value of the Singapore dollar.
· Against other currencies such as the US Dollar.
(c) (ii) Discuss two impacts on Singapore that will arise from an appreciation of exchange rates.
· When S$ appreciates, prices of exports increase in overseas markets.
· If demand is elastic then foreign currency earnings will fall.
· This will lead to a smaller BOP surplus. Reverse for inelastic demand.
· When S$ appreciates, quantity demanded for S$ increases.
· This cause the BOP surplus to become bigger.
· Only if demand is inelastic will there be no change in foreign exchange expenditure.
· In the long run, the demand for Singapore exports will decrease and demand for the cheaper imported goods will increase. This will then lead to worsening of balance of payments.
· It will increase purchasing power of residents abroad e.g. real estate purchasing.
· Reliance on importer goods which are cheaper. Local industry is adversely affected .
d) Explain the roles of the central bank (MAS) as mentioned in the news article.
· One of its role is shown by the phrase “maintaining a gradual appreciation of the S$”
· it will intervene to prevent excessive fluctuation of S$ exchange rate
· MAS use the exchange rate as the main tool of monetary policy.
· It is “keeping an eye on the rise of property prices” because If the prices of goods and services are distorted by inflation, then there will not be clear signs and guides to efficient allocation of resources.
· Inflation will also discourage saving and investment as the value of assets can be eroded by unexpected inflation.
