Headline inflation has been negative for quite some time, but could turn positive towards the later part of this year, barring large shocks to global oil prices or an unexpected decline in COE premiums. Our forecast for 2016 remains unchanged for CPI-All Items inflation at −1.0 to 0%. Headline inflation is expected to converge towards its historical average over the next couple of years. Monetary policy The progressive easing of monetary policy since January last year has been in line with weak underlying inflationary pressures. MAS has taken measured steps to reduce the slope of the nominal effective exchange rate band over the past 18 months. This has been validated by accumulating evidence of weakening inflationary pressures. In April 2016, MAS moved to a zero percent rate of appreciation for the Singapore dollar nominal effective exchange rate policy band. The current stance of monetary policy remains appropriate for overall macroeconomic conditions in 2016. MAS is monitoring global developments closely. Unless there is a marked deterioration in the global economy or significant shift to the inflation outlook, there is no need to change the monetary policy stance. The current stance will help ensure price stability in the medium term. Notwithstanding recent volatility in exchange rates, the nominal effective exchange rate of the Singapore dollar remains within the policy band. MAS’ exchange rate policy framework is sufficiently flexible to accommodate such heightened volatility in international financial markets. MAS stands ready to curb excessive volatility in the trade-weighted Singapore dollar.
Macroprudential policy – car loans and property loans While monetary policy is focused on overall price stability, macroprudential policies target specific areas to promote economic and financial stability. The two key macroprudential measures taken in recent years relate to the property market and car market. In the property market, MAS has implemented prudential limits on loan-to-value, loan tenure, and debt service ratios while the Ministry of Finance has implemented stamp duties on buyers and sellers. This collection of measures is the so-called property cooling measures. In the car market, MAS has implemented limits on loan-to-value and loan tenure. MAS eased the limits on car financing in May this year. But it is not time yet to ease the property cooling measures. The considerations and circumstances in the two markets are quite different. The restrictions on car financing were imposed in 2013 – at a stringent level – primarily to restrain the strong demand for cars and COEs, and consequential pressures on inflation. The objective of curbing inflationary pressures has been achieved. The contribution of private road transport (excluding petrol) to headline inflation has eased from +1.3% points in 2011– 2012 to –0.5% point in the first quarter of this year 2016. MAS therefore reset the car loan restrictions in May this year at a level that would continue to promote financial prudence and support the move towards a car-lite society over the long term.