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Published November 17, 2006

Property surge no cause for worry yet: MAS

Rebound in line with underlying economic growth


(SINGAPORE) The strong rebound in private property prices is not a cause for concern, as long as the price gains are in line with underlying economic and income growth, says a Monetary Authority of Singapore official.

'We've seen some of that in the high end (of the residential property market),' said Khor Hoe Ee, assistant managing director (economics) at MAS. 'At this stage of the game, I don't think we are very concerned yet.'

He was commenting on early signs of asset price inflation, due in part to high global liquidity flows, at an economic roundtable organised by Institute of Policy Studies and BT.

If the price inflation 'does filter down to the lower end, at some point we must be concerned, and not just from a monetary policy perspective but also from a financial stability perspective', he said.

Speculative price pressures were one of the lynchpins in the 1990s economic boom. 'There's only so much you can do in terms of exchange rate policy so we may have to look at other ways in which we can try to address the issue,' Dr Khor said.

'One issue is, of course, financial stability, and that we need to address through regulatory supervisory measures, by making sure that the banks are not exacerbating inflationary pressures in the economy by providing too much liquidity in the system.'

As long as bank credit does not get out of hand, even if there is asset price inflation there is no cause for alarm if the price increases are in line with economic fundamentals, according to Dr Khor.

'But if the inflation were to outstrip growth and income, then at some point it's going to have to reverse. Then the challenge, for not just the central bank but regulators as well, is to see what measures are available to try to slow down the asset price inflation or whether one needs to do anything at all.'

Central banks are unclear as to whether it is more damaging to deal with the consequences after asset price inflation or try to take measures to slow the price hikes, 'simply because the monetary policy instrument is pretty blunt'.

'In our case, we use the exchange rate as our monetary policy instrument,' Dr Khor said. 'We are not overly interventionist or ambitious in terms of what we can do with the exchange rate. Basically, it is to provide a nominal anchor for the economy - that is, to anchor inflation at low levels.'

In response to comments about the strength of the local dollar, he pointed out that Singapore's exchange rate stance is 'not an issue' in capital inflows into the economy.

'The offset to an appreciation of the exchange rate is a lower domestic interest rate. So if you look at interest rate parity conditions we recently tested for the case of Singapore, there's really no additional benefit from putting money into the Sing dollar even if you expected it to appreciate because the appreciation is offset by lower interest rates,' he said.

'There must be something more in order to attract the flows into Singapore. So I don't think the stance of the exchange rate is an issue here, and in fact it's not an issue because you look elsewhere in the region, you see that capital flows are very poorly correlated with the direction of the exchange rates.'