Singapore's central bank said recent monetary policy easings will support the economy and boost inflation over the next two years against a backdrop of weakening growth among the city-state's key trading partners.
Earlier this month, the central bank unexpectedly eased its exchange-rate based monetary policy, its third easing in 15 months, to bolster growth.
In its half-yearly macroeconomic review released on Wednesday, the Monetary Authority of Singapore (MAS) said the latest easing, along with the government's budget this year, provided appropriate support for the economy.
"Cumulatively, these policy recalibrations will help keep the level of real GDP close to its potential in 2016 and 2017,"the central bank said in the review. "These moves will also ensure price stability over the medium term by providing a partial offset to disinflationary pressures, boosting CPI-all items inflation by an average of 0.7 percentage point per annum over the next two years."
Singapore's US$290 billion ($391.7 billion) trade-reliant economy has come under severe strain over the past two years in the face of a global downturn in demand, weighing on exports and leaving its manufacturing sector grappling with losses.
The central bank expects headline inflation at minus-1.0 to 0 per cent this year, but it said CPI-all items inflation would remain negative.
In the semi-annual report, the MAS said wage growth is expected to slow to 2.5-3.0 per cent in 2016 from 3.5 per cent last year.
Singapore's headline consumer prices in March posted a record 17th straight month of annual declines.
The economy failed to post growth in the first quarter from the previous three months on an annualised basis, missing expectations as service sector activity weakened.
ACCOMMODATIVE MONETARY POLICY
The MAS said the more accommodative monetary policy setting combined with the government's mildly expansionary fiscal policy provides "an appropriate and complementary macroeconomic mix to ensure medium-term price stability and sustainable growth."
The central bank expects modest economic growth in coming quarters as trade-related industries face cyclical headwinds.
"In early 2016, the weakness widened to more industries," it said.
"The pullback was most evident within the modern services cluster, with financial sector activity hit by falling credit demand and lower fee income from fund management after a surge at year-end."
The central bank maintained its forecasts for the city-state's economy to grow 1-3 per cent this year and expected no recession in 2016.
Analysts say markets should prepare for the risk of the central bank following up this month's easing with another policy move, suggesting a one-off currency devaluation in the event the economy deteriorates further.
The financial industry has seen cutbacks by large investment banks leading to vacancies at Singapore's gleaming office towers nearing their highest level in almost a decade.
Singapore, one of the world's leading financial hubs, houses thousands of global companies who use the city-state as a regional hub for Southeast Asia and Asia. "Signs of a further downshift have emerged in the domestic corporate landscape, with forward-looking business expectations pointing to a weaker outlook in H1 2016," the MAS said.
Singapore's manufacturing sector has been hit by a fall in global oil prices, which have dampened demand for oil rigs built by Keppel Corp and Sembcorp Marine.