MAS says committed to price stability

Pre-emptive moves to cope with ballooning asset prices? MAS prefers...

By Melissa Tan, The Straits Times, 8 May 2012

RELYING on more targeted measures to control rising asset prices may be preferable to using interest rates and exchange rates, especially when there are strong capital inflows and domestic growth, the central bank said yesterday.

Monetary Authority of Singapore (MAS) deputy managing director Ong Chong Tee told a conference that low interest rates may encourage risky borrowing. When such highly leveraged markets correct sharply, they may cause damage to the economy.

Central bankers are opting to take pre-emptive measures to cope with ballooning asset prices, Mr Ong said.

He was speaking at an annual conference at Singapore Management University's Sim Kee Boon Institute for Financial Economics, with the theme of 'asset price bubbles'.

Asset price bubbles are dangerous because their bursting can cause financial instability and depress the economy.

The shock from a bubble bursting also seems to increase the chances of successive shocks in other asset classes, said another conference speaker, Professor Yacine Ait-Sahalia, director of the Bendheim Centre for Finance at Princeton University.

He also warned that after a bubble bursts, only a few assets benefit from the resulting 'flight to quality' and most asset classes tend to decline together.

Mr Ong said, for example, in a specific market such as property, using administrative measures may be preferable to using broad tools such as exchange rates or interest rates.

Some of the administrative tools Singapore has put in place include loan-to-value (LTV) ratios and buyer and seller stamp duties 'to prevent the formation of asset price bubbles', he said.

In January last year, the Government lowered the LTV ratio cap on housing loans from 70 per cent to 60 per cent, for individual home buyers who already have at least one mortgage when they buy a new house. The LTV ratio indicates how much cash a buyer has to put down when buying a home, so a lower cap means buyers now have to use more of their own cash rather than borrowed money to finance home purchases.

The Government also implemented an additional buyer's stamp duty last December to cool the residential property market.

Calling Singapore's approach 'targeted and incremental', Mr Ong said the MAS was 'focused on discouraging short-term speculative activity that can distort underlying prices, while encouraging greater financial prudence among property purchasers'.

The need for measures that are specifically targeted at individual asset classes, such as property, arises because exchange rates and interest rates are 'broad policy instruments' that have 'very significant collateral effects, and are often subject to long and variable lags before impacting asset markets', Mr Ong noted.

He also called for indicators for assessing the efficacy of the measures designed to combat asset price bubbles.

However, he cautioned that such tools are meant to make sure that systemic risks are well contained, and 'cannot be a substitute for macroeconomic policies', which focus on 'correcting macroeconomic imbalances'.

He said that monetary policy has to be carefully calibrated to take into account the many influences on consumer prices.

'Our studies continue to show that in our small, open economy, the exchange rate has a significantly greater impact on growth and inflation compared with domestic interest rates,' he noted. In the case of rising prices caused by strong demand, the MAS is using a stronger Singapore dollar to ease these pressures.

But where costs are rising because of supply factors, such as from a shortage of labour, the MAS believes that monetary policy should not aim to fully offset the effects.

However, Mr Ong said the central bank will be vigilant to the risks that there could be a second round of price effects.

The challenge for monetary policy is to distinguish between the relative importance of demand and supply factors.

He added there was 'much scope for further study' to develop statistical techniques to identify demand and supply shocks and 'early warning indicators for different types of inflationary pressures'.

With the inflation forecast for this year between 3.5 per cent and 4.5 per cent, Mr Ong said inflation is expected to ease gradually later this year, but remain along an elevated trajectory.

Other conference speakers included 1996 economics Nobel laureate James Mirrlees, an emeritus professor of political economy at the University of Cambridge, and Yale University economics and statistics professor Peter Phillips.