SINGAPORE - Singapore's central bank lowered its inflation outlook for the year on Tuesday but said it was concerned about household debt levels as interest rates looked set to rise.
The Monetary Authority of Singapore (MAS) revised downwards its inflation forecast for 2013 to 2-3 per cent from an earlier 3-4 per cent, citing the sharp fall in car prices earlier this year as well as a slower rise in accommodation costs.
Economic growth this year will "comfortably" meet the official forecast of 1-3 per cent, the central bank added, citing the strengthening US economy and Japan's expansionary policies that will likely offset headwinds from a slowdown in China and easing public spending in some Southeast Asian countries.
"For the first time in three years, CPI inflation has come down closer to historical trends and within MAS's comfort range," MAS managing director Ravi Menon said during a press briefing for the release of the central bank's annual report.
But MAS warned that core inflation - which excludes cars and accommodation since these were more influenced by government policies - could rise "moderately" to 2 per cent or slightly higher in the latter half of 2013 due to continuing tightness in the labour market.
Headline inflation averaged 2.8 per cent for the first half of 2013, data showed.
MAS was committed to ensuring that the recent improvements in inflation were sustained and the "current policy stance of modest appreciation of the Sing dollar is appropriate in containing re-emergence of strong cost and price pressures in a restructuring economy," Menon said.
Singapore's economy grew by just 1.3 per cent in 2012 while headline inflation was 4.6 per cent.
The central bank, however, expressed concerns about rising household debt in the city-state and said an estimated 5-10 per cent of borrowers had "probably over-leveraged on their property purchases" based on their total debt service payment ratio of more than 60 per cent of monthly income.
"If mortgage rates were to rise by 3 percentage points, the proportion of borrowers at risk could reach 10-15 per cent,"Menon said.
Menon said household balance sheets in Singapore were resilient at an aggregate level, with cash and deposits exceeding debt, but the healthy balance sheets were not uniform across households.
Banks in Singapore now offer housing loans at around 1.1 to 1.2 per cent per annum, well below the 3.5 per cent level that financial institutions must use when calculating debt servicing ratios of potential borrowers based on the latest central bank requirements.