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imageSINGAPORE: Singapore's economy will probably grow moderately over the next few quarters, while core inflation is likely to stay firm due to wage cost pressures from a tight labour market, the central bank said on Tuesday.

Singapore's economy is likely to stay on a moderate growth trajectory, given that global growth is expected to improve in 2015 compared to this year, the Monetary Authority of Singapore (MAS) said its half-yearly macroeconomic review.

"Aggregate demand in Singapore is expected to rise in line with the recovery in the global economy. However, this will be capped by the ongoing restructuring in the domestic economy and the uneven growth in Singapore's major trading partners," the central bank said.

The MAS reiterated Singapore's official economic growth forecast of 2.5-3.5 percent in 2014, adding that the economy is likely to grow at a "broadly similar pace" in 2015.

The central bank said core inflation on a year-on-year basis is likely to pick up slightly into early next year before easing in the second half. It reiterated that core inflation is expected to average 2-2.5 percent in 2014 and 2-3 percent in 2015.

It added that there was some uncertainty on the outlook for core inflation, stemming from possible moves in oil prices in the next few months.

"Domestic cost pressures, mainly emanating from the tight labour market, will remain the primary source of inflation. However, the extent of cost pass-through to consumer prices is likely to be uneven across sectors," the MAS said.

Earlier this month, the MAS cut its forecasts for headline and core inflation this year but stuck to its tight monetary policy stance of allowing a "modest and gradual" appreciation of the Singapore dollar, saying wage inflation is likely to remain relatively firm and core inflation is likely to stay above its historical average over the next few quarters.

The government's push to boost productivity while reducing reliance on foreign workers has led to tightness in the labour market which has fueled wage pressures.

While headline consumer inflation has been subdued this year due to a moderation in housing costs and car prices, core inflation has risen. Core inflation excludes changes in the prices of cars and housing and is a focal point for MAS policy.

"Since the balance of risks remains slightly tilted towards higher core inflation, the prevailing monetary policy stance continues to be optimal in ensuring domestic price stability over the medium term," the MAS said, referring to its Oct. 14 policy decision. On the outlook for core inflation, the central bank said that strong wage growth in sectors such as education and healthcare will probably be passed on to consumer prices, although the impact of measures such as healthcare subsidies could lessen some of these cost pressures.

Parts of the retail industry, however, could find it difficult to raise prices, the MAS said.

While there has recently been some pass-through of costs to consumers in some services sectors, such as recreation and entertainment and prepared meals, price adjustments in some sectors have been weak, the central bank said.

"The price of household services declined as foreign maid agencies recently lowered recruitment fees, given more intense competition. Prices of clothing and footwear and personal care items also came under downward pressure, likely on account of competition from online stores," the MAS said.

The MAS added that headline, all-items inflation could ease to below 0.5 percent in the fourth quarter of this year, due to a comparison against a high base a year ago when the prices of car ownership permits surged.

It reiterated that all-items inflation was likely to come in at 1-1.5 percent in 2014, and 0.5-1.5 percent in 2015.

Copyright Reuters, 2014

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