MAS raises inflation forecast, economy posts 9.9% Q1 growth - Essay Example

MAS Raises Inflation Forecast, Economy Posts 9.9% Q1 Growth MAS Raises Inflation Forecast, Economy Posts 9.9% Q1 Growth IntroductionThis article discusses the action of Monetary Authority of Singapore (MAS) to raise the inflations in Singapore. These are stringent measure to cushion the country’s economy from inflationary pressures. According to this article, the central bank in Singapore projects inflation may average 3.5 to 4.5 percent. This is a slight deviation from the earlier forecast of 2.5 to 3.5 percent.

This increase in inflation prediction came after Singapore experienced growth of Gross Domestic Product of 9.9 percent on the first quarter and 1.6 percent in economy higher than in 2011. The economists in Singapore did not expect such a huge growth in GDP. They had predicted that Singapore economy would grow by 6.3 percent in 2012. According to MAS, this move will enable the Sing dollar to appreciate faster keeping the importation costs at a low and reasonable level (Low, 2012). This paper first analyzes critically the above article.

Second, the paper explores the link between the article and economic models and concepts. Third, the paper proposes some economic solutions, which Singapore should take to address the issue of inflation. Finally, the last section of the paper will summarize its content. Inflation Issue The article in question discusses precautionary measures, which the central bank of Singapore has put in place to address inflation. The measures entail adjustment of monetary policies on perception that stronger and unexpected GDP growth in the first quarter may not hold in the rest of the year.

Adjusting the inflation forecast from 2.5-3.5 percent range to 3.5-4.5 percent is one of the crucial tools, which Monetary Authority of Singapore (MAS) uses to control inflation. Monetary Authority of Singapore believes that this tighter move will ensure stability in medium term prices. In addition, central bank of Singapore believes the tighter monetary policy will enable Singapore economy to continue growing in a sustainable way. Central bank in Singapore reveals that the high inflation rates will have to remain in place for a few months before easing.

Persistent inflationary pressures on the Sing dollar directed the Central bank in the country to come up with this tight monetary policy. Although it is a surprise to the financial market, Singapore expects its dollar to strengthen because it has a sound policy on foreign exchange (Low, 2012). Analysis of Article Using Economic Concepts and Models The article depicts that inflation is a major concern in Singapore. The government of Singapore feels that inflated prices of oil and rising cost of labor are chief contributors to the high inflation rates.

Monetary Authority in Singapore predicts that the prices of these commodities will not ease soon. Therefore, central bank in Singapore believes that its move to tighten the monetary policy is beneficial to the economy of the country. This is because the policy will enable Singapore to overcome the pressures of inflation. The policy seeks to make the Sing dollar appreciate thereby reducing exportation cost. In addition, it will allow Singapore to continue registering a positive economic growth (Low, 2012).

Inflation encompasses sustained increase in average price level in the economy. It entails calculation of a consumer price index (CPI). High inflation makes the cost of living high. High inflation rate has negative effects on economy of a country. First, it lowers the purchasing power of a nation. This is because inflation creates a fall in income. Second, inflation discourages saving. This is because the banks adjust their rate to cope with inflation. It therefore means that high rate of inflation has negative effects on accumulated interests.

Third, high inflation rates make commercial banks adjust their nominal rates in order to keep the real rate, which they earn, positive. Uncontrolled supply of money can be a principle cause of inflation. This implies that the amount of money in circulation should be equal to national economic output (Ball, 2007). In the light of the detrimental effects of high inflation rate on economy, individual countries enact policies to keep inflation rates low and stable. Inflation forecast is an essential move for financial planning.

It enables a country to deal with volatile instabilities of demand on money and unanticipated external shocks (Economic Policy Group, 2011). The move by the Monetary Authority of Singapore to raise inflation forecast aims at making the country’s currency scarce. This will necessitate the government of Singapore to put sound measures in place to stabilize the prices of commodities. Low circulation of Sing dollar will make it gain its value. The monetary policy depicted in this article adjusts the supply of money to facilitate fair transactions in the economy (Economic Policy Group, 2011).

Faster appreciation of Sing dollar will enable it to compete fairly in the financial market. This makes importation of goods less costly. This is because the exchange rate of appreciated Sing dollar is high when compared to most regional currencies in the international financial markets. There is also a firm demand of money in the country. This is because the money in circulation is not sufficient. This makes the Sing dollar appreciate allowing Singapore to attain a meaningful economic growth.

It is therefore plausible for the central bank of Singapore to raise inflation forecast. This is because such a move creates a sequential growth in the monetary base of the currency in active circulation. Accessed 4 June 2012, from http://moneycentral.msn.com/content/data/images/Charts/Asia%20inflation.jpg Economic Solution to Inflation The article depicts a sound policy that deals with foreign exchange rate. The policy is a double-edged sword. This is because the increasing inflation forecast rate makes the Sing dollar appreciate.

Appreciation of Sing dollar will enable importers to incur less cost on their imports. However, the policy may discourage external investors from venturing into Singapore markets. Singapore should explore other alternatives. These alternatives include improving central banking institutions and practices and increasing awareness of the costs of inflation. Other choices, which Singapore should look at, include setting supply side policies and fiscal policies. Supply side policies target long-term competiveness and productivity (Ball, 2007).

Deregulation and privatization of firms can make firms more productive. This can eliminate inflationary pressure that makes Singapore cushion its economy against inflation. Fiscal policy that calls for government to change tax and mode of expenditure can help Singapore to deal with inflation. In addition, Singapore policymakers should increase their communication with the public and markets about their plans on monetary matters. This encourages opinions and insights from the public thereby helping the policymakers and central bank of Singapore to devise sound policies to tackle inflation (Ball, 2007).

These solutions are very crucial in keeping inflation at a low level. They will help to promote price stability, which in the long run leads to high level of economic output and rapid economic growth. The graph below show inflation rates in Asia. Accessed 4 June 2012, from http://www.business-in-asia.com/asia/images/inflation_graph.jpg Conclusion The article reveals that Singapore pays attention to inflation. This has called for the country to put in place a stringent monetary policy that entails raising inflation forecast rates.

It is a precautionary move by the central bank in Singapore to cushion the economy of their country. Forecasters of inflation feel that Singapore may experience a retarded growth in economy because of external pressure such as volatile prices on oil. Although increasing inflation forecast may exert pressure on Singaporeans, it will have long-term benefits to the economy of the country. The policy seeks to increase the value of Sing dollar. Appreciation of Sing dollar will make importation of goods less expensive.

References Ball, R.J (2007). Inflation and the Theory of Money. New Jersey: Transaction Publishers. Economic Policy Group (2011). Monetary Authority of Singapore. Retrieved 29 May 2012, from http://www.mas.gov.sg/resource/publications/macro_review/2011/MRApr11.pdf. Low, A. (2012). MAS raises inflation forecast, economy posts 9.9% Q1 growth, Straits Times. Retrieved 29 May 2012, from http://www.straitstimes.com/BreakingNews/Singapore/Story/STIStory_788323.html.