Singapore raising GST bolsters case for MAS to tighten policy: Analysts

SINGAPORE (BLOOMBERG) – An expected hike in Singapore’s goods and services tax (GST) this year is raising pressure on the central bank to tighten monetary policy as it seeks to rein in mounting inflation pressures, according to analysts polled.

The Monetary Authority of Singapore (MAS), which uses exchange rates as its main policy tool, will likely aim to let the local currency appreciate further at its next policy meeting in April, according to 12 analysts’ estimates compiled by Bloomberg.

Strengthening the Singapore dollar would blunt the impact of rising costs for imports.

Trade-reliant Singapore has already flagged its concern over inflation and the MAS unexpectedly tightened policy in October. A hike in the GST, expected as soon as April, is crystallising expectations that MAS will act again to help offset the resulting increase in prices.

Central banks around the world are taking an increasingly aggressive stance towards countering rising prices, with the United States Federal Reserve indicating faster rate hikes than previously expected this year.

“We cannot rule out a more aggressive move if inflation continues to surprise on the upside and the GST hike materialises,” said Dr Chua Hak Bin, senior economist at Maybank Kim Eng Research, who expects a rise of 50 basis points in the slope of the MAS currency band.

Analysts at Citigroup, Goldman Sachs Group and Nomura Holdings see prospects for a hike of as much as 100 basis points.

In addition to raising the slope of the currency band – which allows for a gradual strengthening – analysts at Barclays expect the entire band to be re-centred higher by 100 to 150 basis points. A full pass-through of GST into core inflation could require an upward re-centring of 100 to 200 basis points, according to Citigroup.

An off-cycle tightening before the MAS’ scheduled meeting in April cannot be ruled out, “especially if global central banks start to tighten faster than expected”, TD Securities macro strategist Alex Loo wrote in a note last week.

Surprising history

MAS has a history of surprising market expectations, including easing policy in 2016 to counter a slowdown in global trade and raising the slope of its currency band “slightly” in October last year amid concerns about rising price pressures. While the MAS does not publicise the slope of the currency band, several economists estimate it at 0.5 per cent.

There remain “upside risks” to inflation if GST is hiked to 9 per cent from 7 per cent, Nomura analysts wrote in a report last week. While a 100 basis point increase is most plausible, the MAS may “possibly increase the slope of appreciation further, if there are further signs that local inflationary pressures may be broadening”, they said.

The Singapore dollar has lost 0.5 per cent against the US dollar since the October decision, mainly driven by strengthening in the US currency on the back of Fed tapering expectations.

Economists surveyed by Bloomberg estimate that headline inflation accelerated 2.1 per cent last year, the fastest since 2013, and expect it to rise by a further 1.9 per cent this year. The MAS has forecast a rise of 1.5 per cent to 2.5 per cent this year, with its core inflation measure gaining 1 per cent to 2 per cent.

At the end of last year, Prime Minister Lee Hsien Loong signalled that a rise in the GST would be included in February’s fiscal budget announcement, with the country seeking to bolster its balance sheet as it emerges from the worst of the pandemic.

“We believe the MAS will view a GST rate hike as evidence of the Government’s confidence in the economic recovery, which in turn would justify continued normalisation in foreign exchange policy settings,” Barclays economist Brian Tan wrote in a note last Friday.