SINGAPORE: Economists expect the Monetary Authority of Singapore (MAS) will hold steady on its Singdollar stance when it meets next month.

That policy is to allow the local currency a "modest and gradual" appreciation against a basket of currencies of the country's major trading partners such as Malaysia, the European Union and China.

The exchange rate is the government's main tool to combat inflation – a stronger dollar means imports cost less in Singdollar terms. But a strong Singdollar can put a dampener on growth by making exports less competitive.

While economists do not expect a change from the MAS, they warn that inflation is poised to rise after a relatively flat period, due to escalating car prices and an ever-tightening labour market.

Consumer prices were up two per cent in August over the same month last year, marking the fifth straight month that inflation has come in at or below two per cent.

However, OCBC economist Selena Ling said domestic cost pressures from the tight labour market are still a concern, especially on the back of a recent announcement made by the Ministry of Manpower.

Under the new Fair Consideration Framework, companies will soon have to prove they tried to hire Singaporeans first before they are allowed to recruit foreign professionals.

They will also have to pay foreigners with employment passes more from January next year.

"(The government's) announcement of the Fair Consideration Framework and the enhanced employment pass qualifying requirements suggest there may not be any let-up in terms of the domestic labour market tightness in the near term," said Ling.

Barclays economist Joey Chew agreed that "there are considerable cost pressures in the economy" from the labour shortage, and inflation is likely to accelerate towards the end of the year and into next year.

"Producers are only waiting for the right moment to pass on the costs, for example, when growth conditions improve," she added.

Recent policy changes that attempt to separate premium cars from mass-market models in the Certificate of Entitlement (COE) bidding process will continue to prop up premiums, noted UOB economist Francis Tan.

Tan said the move has prompted many potential car buyers to bring forward their purchases, due to expectations that premiums will be higher next year.

"Together with the appealing discounts given by car dealers to reduce their inventories as another carrot for attracting new car buyers, this renewed wave of buying may prompt COE prices to go on an upward trend," he added.

A combination of these factors and the uncertain global economic outlook mean the MAS will have limited room to manoeuvre, said JP Morgan economist Matt Hildebrandt.

"The global recovery remains fragile and numerous risks remain, so the MAS does not have much room to tighten policy...Given the improved growth outlook and expectation for price pressures to firm, the MAS (also) has no room to ease next month," he added.

– By arrangement with the ANN/The Straits Times –