ong chong tee : financial economics opening address by mr ong chong tee, deputy managing director of the monetary authority of singapore, at the skbi annual conference on “ financial economics ”, at singapore management university ( smu ), singapore, 7 may 2012. * * * professor arnoud de meyer, president of singapore management university distinguished guests, ladies and gentlemen, good morning. introduction it gives me great pleasure to join you today at skbi ’ s second annual conference on financial economics. since its establishment in 2008, skbi has pursued research on topics in economics and finance relevant to asia and the singapore economy. a recent working paper on “ testing for multiple bubbles ” by phillips, shi and yu, for example, sheds light on techniques for identifying asset price bubbles, and has useful implications for the surveillance strategies of central banks. 1 i am privileged to join an outstanding line - up of speakers including keynote speaker professor sir james mirrlees. i think some of you may be familiar with his groundbreaking work on optimal tax policy, and his modelling of the key role uncertainty plays in economics. the mirrlees review, a recent review of the uk tax system chaired by sir james, offers invaluable practical lessons on optimal tax design, including specific recommendations for the taxation of savings and wealth. structural change in the singapore economy the perfect financial storm of the recent crisis severely disrupted markets and economies, and also shook key tenets fundamental to our understanding of economics and finance. established beliefs in efficient markets, asset price dynamics, and more, have all been called into question. amid the flux in the global financial and economic landscape, singapore also has its own challenges. resource constraints mean that we have to restructure the economy to depend less on the labour force and more on productivity increases for growth. during this period of transition, important adjustments in domestic resource costs and consumer prices are taking place, alongside the usual cyclical developments confronting the economy. dealing with the confluence of factors affecting domestic prices has been particularly challenging, for us at the central bank and equally so for consumers and businesses. cpi - all items inflation, for instance, has been elevated coming out of the recent financial crisis, averaging 4. 1 % since 2010, much higher than the historical norm of below 2 %. mas core inflation, which excludes changes in accommodation and private road transport costs, averaged a lower 2. 0 % over the same period. consumer price pressures have picked up more recently. cpi - all items inflation

parcel of the market ’ s equilibrating process to guide the economy to a sustainable growth path. but mas will be vigilant to the risks that these price developments can set off second - round price effects if left unchecked. the appropriate monetary policy response thus depends on the nature and persistence of the shocks that are affecting prices. herein lies the monetary policy challenge : how do we distinguish between the relative importance of demand and supply factors in driving cost and price increases in the economy? on one hand, there could be a risk of keeping policy too loose and unhinging inflation expectations. on the other hand, stamping out inflation aggressively could forestall the important signalling role of relative price adjustments, as well as add to transitional costs, including the negative impact on growth. let me illustrate with the example of ongoing changes in our labour market. while the shift in foreign worker policy is necessary to allow for a more efficient allocation of resources and a more productive workforce, the latter will take time to come to fruition. during this transitional phase, business costs are likely to rise somewhat as a result of tight labour market conditions, before productivity gains catch up to offset the cost increases. in the short term, the prices of some consumer services – especially those with high labour content – can rise and indeed, have increased in the early months of this year. bis central bankers ’ speeches reflecting these considerations, the tighter monetary stance adopted by mas in april 2012 was a calibrated move to facilitate the ongoing supply - side adjustments, while anchoring inflation expectations. the policy stance was aimed at keeping the economy on an even keel with gdp growth expected to come in at 1 – 3 % this year. we expect that headline and core inflation will ease gradually through the year, but along a somewhat elevated trajectory. over time, the cumulative appreciation of the exchange rate will temper the pace of price increases in the economy. mas is firmly committed to our objective of price stability over the medium term, even as productivity improvements arising from the significant economic restructuring will help to prevent higher costs from fuelling strong price increases. to ease the immediate burden of price and cost pressures faced by households and businesses during this period of transition, the government has implemented a wide - ranging package of relief measures. these include targeted utility rebates that directly alleviate the higher cost of living for households. similarly, smes received a one - off cash grant in this year ’ s budget to help offset higher business costs. implications for asset