MAS tightens Singdollar policy earlier than expected amid rising inflation

SINGAPORE – In a surprise move, Singapore’s central bank tightened its monetary policy on Thursday (Oct 14), saying it expects rising inflation and aims to ensure price stability over the medium term.

The Singapore dollar jumped about 0.3 per cent after the announcement to hit a three-week high of 1.3475 per US dollar. At 11.15am, the Singapore dollar had pared its gains to the greenback to trade at 1.3497, 0.15 per cent higher.

In its tightening move, the Monetary Authority of Singapore (MAS) slightly raised the slope of its Singapore dollar nominal effective exchange rate (S$NEER) policy band, up from zero per cent previously.

The width of the policy band and the level at which it is centred remain unchanged.

MAS said: “Growth in the Singapore economy is likely to remain above trend in the quarters ahead. Barring a resurgence of the (Covid-19) virus globally or a setback in the pace of economic reopening, output should return to around its potential in 2022.

“At the same time, external and domestic cost pressures are accumulating, reflecting both normalising demand as well as tight supply conditions.”

The Singapore dollar remaining firm means that for those looking to travel, the exchange rates may be in their favour against other currencies, CIMB Private Banking economist Song Seng Wun explained.

For the local consumer, the stronger Singapore dollar also means that inflation may not be as high as it could be.

He noted that material costs have gone up, which means that laptops, tablets and even washing machines can become more expensive.

The tightening of monetary policy helps to offset some of these rising costs for local consumers.

OCBC chief economist Selena Ling pointed to MAS’ move being spurred by broader and persistent price pressures, including supply chain problems, rising energy prices, foreign manpower crunch and even the expansion of the Progressive Wage Model to more sectors and occupations.

MAS expects core inflation this year to come in near the upper end of its zero per cent to 1 per cent forecast range, and is expected to increase further to 1 per cent to 2 per cent next year.

Overall inflation will come in at around 2 per cent this year, at the top end of MAS’ forecast range, and average 1.5 per cent to 2.5 per cent next year.

MAS uses the S$NEER as its main policy tool rather than interest rates, because Singapore is a small and open economy with a heavy dependence on trade.

The S$NEER is the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies of the nation’s major trading partners. It is allowed to float within an unspecified band. If it goes out of this band, MAS steps in by buying or selling Singapore dollars.

MAS thus changes its monetary policy by adjusting the slope, width and midpoint of this band based on assessed risks to the country’s growth and inflation.

It said: “This appreciation path for the S$NEER policy band will ensure price stability over the medium term while recognising the risks to the economic recovery.”

In an earlier poll by Bloomberg, economists had tipped MAS to signal a potential tightening of monetary policy next year, while holding steady for now.

This is amid rising inflation risks from supply chain disruptions and surging energy prices.

Fourteen of the 15 analysts surveyed had predicted that MAS would strike a more hawkish tone, while the same number expected that the authority would wait until its April 2022 statement to tighten policy.

Only one economist expected MAS to raise the slope of its currency band by 0.5 per cent from its current zero-appreciation level – representing a tightening move.

Singapore’s core inflation rose to more than a two-year high in August amid higher food prices.

Core inflation, which excludes accommodation and private road transport costs, rose to 1.1 per cent on a year-on-year basis, partly due to the low base effect from last year.

MAS said: “In the quarters ahead, rising imported and labour costs, alongside the recovery in domestic activity, will support a broad-based pick-up in inflation. Imported inflationary pressures are likely to persist for some time amid strengthening global demand and lingering supply constraints.”

It added that on the domestic front, wage growth is likely to be firm alongside the dissipation of labour market slack to next year.

“The accumulating business costs will pass through to consumer price inflation as the domestic economy reopens and private consumption recovers. Various service fee increases that were put on hold since the pandemic began, such as for transport, healthcare and education, could also resume,” it said.

MAS also expects the Singapore economy to sustain a “firm pace of growth” in the coming quarters, with growth in the trade-related and modern services sectors to be supported by the resilient electronics cycle and improving business activity.

“Barring the materialisation of tail risks such as the emergence of a vaccine-resistant virus strain or severe global economic stresses, the Singapore economy should remain broadly on an expansion path,” it said.

“The slack in the labour market should continue to be absorbed and the negative output gap close in 2022.”

Mr Song added that this slight tightening, which marks the start of a new growth cycle for Singapore’s economy, is in line with similar moves by central banks in the region. 

National University of Singapore business school professor Lawrence Loh said: “The current tightening signals that we are expecting economic growth to pick up locally and even globally sooner – thus it is necessary to adapt earlier.

“Many major economies are opening up and seeking a steady state to live with Covid-19 and if there are no significant new coronavirus variants that appear, we expect the current economic momentum to be sustained.”

The Singapore dollar’s rise against the US currency may be short-lived.

DBS senior FX strategist Philip Wee said the US dollar should still end the year at 1.37 against the Singapore dollar, given that the United States central bank is poised to tighten monetary policy to address accelerating inflation.