As published on straitstimes.com, Monday 20 March, 2023.
Recent developments in the international banking industry, such as the announced takeover of beleaguered lender Credit Suisse by rival UBS, would not have direct implications for the long-term path of inflation in Singapore.
The path depends on longer-term structural factors, rather than such near-term shocks, said Minister of State for Trade and Industry Alvin Tan in an exchange with Mr Saktiandi Supaat (Bishan-Toa Payoh GRC) in Parliament on Monday.
These longer-term factors include demographics, technological advances that have an impact on productivity, and future trends and globalisation that affect the Singapore dollar nominal effective exchange rate (S$Neer), Mr Tan said.
The S$Neer is the exchange rate of the Singapore dollar against a trade-weighted basket of currencies of the Republic’s major trading partners, which the Monetary Authority of Singapore (MAS) manages to maintain price stability conducive to sustained growth of the economy.
Mr Tan was responding to questions from Mr Saktiandi about how often MAS and the Government assess long-term inflation estimates, and the impact of recent global developments in finance on inflation and Singapore’s financial sector.
Addressing the announced takeover of Credit Suisse by UBS, Mr Tan said Credit Suisse will continue operating in Singapore with no interruptions or restrictions.
“Customers of Credit Suisse will continue to have full access to their accounts and Credit Suisse’s contracts with counterparties remain in force. The takeover is not expected to have an impact on the stability of Singapore’s banking system.”
He said that Singapore’s banking system remains sound and resilient as the Singapore dollar money market and foreign exchange markets continue to function well.
Referring to recent failures of banks in the United States, Mr Tan said: “The Singapore banking system has insignificant exposures to the failed banks in the US, and Singapore banks have confirmed that exposure to Credit Suisse is insignificant.”
Banks in Singapore are well capitalised and conduct regular stress tests against credit and other risks, he said. “Their liquidity positions are healthy, underpinned by a stable and diversified funding base.”
He added that MAS, which is closely monitoring the domestic financial system and international developments, is ready to provide liquidity to ensure that Singapore’s financial system remains stable.
In another exchange, Associate Professor Jamus Lim (Sengkang GRC) asked Mr Tan if MAS has observed any evidence of inflationary pressures being passed on to wages, as well as the mechanisms the authority has to deal with the possible entrenching of these pressures on wages.
Responding, Mr Tan said MAS expects core inflation to ease more discernibly over the second half of 2023, reflecting “a combination of base effects, and moderating external and domestic labour cost pressures”.
He added: “But more broadly, wages in Singapore are not tightly indexed to inflation. Over the years, our tripartite wage-setting institutions have ensured that wage outcomes remain in line with productivity growth.
“For these reasons, we assess that the risk of a wage-price spiral remains contained at this point, but we will closely monitor developments as they come.”
Both exchanges followed Mr Tan’s initial reply to questions Mr Saktiandi filed on whether the new normal of endemic Covid-19 and global inflation shifts could scupper the timely return to long-term inflation targets, and whether there is a risk of a rise in current estimates of long-term inflation.
In his reply, Mr Tan said the available measures indicate that Singapore’s long-term inflation expectations remain well anchored.
“The five-year-ahead inflation forecasts of economists and professional forecasters have been broadly unchanged over the past two years,” he added.
While households’ longer-term inflation expectations picked up from late 2021 to early 2022 in tandem with rising global and domestic inflation, the latest survey in December 2022 showed that “expectations have fallen close to the historical levels”, Mr Tan added.
The stabilisation of households’ longer-term inflation expectations occurred alongside a similar outcome in actual inflation in late 2022.
“On a month-on-month basis, the pace of increase in core prices has trended down over the second half of 2022,” said Mr Tan.
“MAS, like other central banks, will continue to focus on stabilising near-term inflation and price expectations, as these weigh heavily in the formation of longer-term inflation expectations.”