SINGAPORE: The Monetary Authority of Singapore (MAS) tightened monetary policy on Tuesday (Jan 25) in an attempt to counter rising inflation.
The central bank, which typically holds policy meetings in April and October, said it would “slightly increase” the rate of appreciation of the Singapore dollar’s nominal effective exchange rate (S$NEER) policy band.
The width of the policy band and its center level remain unchanged, it said.
The off-cyclical tightening comes after official data showed that Singapore’s core inflation — a key measure of the Monetary Authority of Singapore — rose last month at the fastest pace in nearly eight years on the back of a sharp rise in air ticket prices. .
Even then, most economists did not expect MAS to change its monetary policy stance before April.
The central bank said its latest move “builds on the pre-emptive shift to appreciation stance in October last year” and is “suitable to ensure price stability in the medium term”.
The last time MAS surprised the market with an off-cycle move was in January 2015, when it unexpectedly lowered the slope of the range. Subsequently, a sharp drop in global oil prices caused a major shift in its inflation outlook.
How does MAS monetary policy work?
Unlike most central banks that manage monetary policy through interest rates, the Monetary Authority of Singapore uses exchange rates as its main policy tool because Singapore is an open economy that relies heavily on trade.
This refers to S$NEER – the Singapore dollar against a trade-weighted basket of currencies from Singapore’s main trading partners.
S$NEER is allowed to float in an unspecified range. If it falls outside this range, the MAS steps in by buying and selling Singapore dollars.
The central bank also changes the slope, width and midpoint of the band when it wants to adjust the rate of appreciation or depreciation of the currency based on assessed risks to Singapore’s economic growth and inflation.
By raising the slope of its policy band on Tuesday, the MAS is effectively allowing the Singapore dollar to appreciate, making imports cheaper and exports more expensive.
Why tighten monetary policy now?
In its policy statement, the MAS said its inflation outlook had been upgraded since October, “against the twin effects of a recovery in global demand and persistent supply-side frictions”.
“Upside risks to inflation remain due to the impact of pandemic-related and geopolitical shocks on global supply chains,” it added.
As a result, the central bank said it expects core inflation to pick up in the short term, possibly reaching 3 percent by the middle of the year, before slowing.
This is due to “rapidly accumulating” external and domestic cost pressures, such as supply disruptions pushing up the cost of imported food, rising energy prices and a tight labor market.
“While core inflation is expected to moderate in the second half of the year from the highs seen in the first half as supply constraints ease, risks remain skewed to the upside,” it noted.
In light of this, MAS said it now expects core inflation, excluding the cost of private transport and accommodation, to rise by 2% to 3% this year. That was up from the 1% to 2% forecast in October.
Headline inflation forecasts for 2022 have also been revised to a range of 2.5% to 3.5%, up from a previous forecast range of 1.5% to 2.5%.
Song Seng Wun, an economist at CIMB Private Bank, said the MAS may decide to take pre-emptive action now, rather than wait for its scheduled policy meeting in April, given that inflation is on the rise and there is no sign of a slowdown in sight.
“After the December inflation report, especially core inflation, they may ask: do we wait until April to tighten or tighten sooner as there could be more upside surprises in prices?
“So they chose to pre-empt and see clearly that prices are not going to fall any time soon,” Mr Song said, adding that the inflation figure for the first quarter could be “higher”.
Alex Holmes, emerging Asia economist at Capital Economics, agreed, noting that “the Monetary Authority of Singapore is clearly concerned”.
“We think the biggest risk to core prices comes from the domestic outbreak of Omicron,” he added. “While the government’s modest measures to contain the virus should limit its impact on GDP (gross domestic product), one trade-off for allowing more infections could be inflation.”
Mr Holmes said he expected prices to “continue to rise rapidly”, with core inflation exceeding 3 per cent by March and beating the central bank’s latest forecast range, averaging 3.1 per cent this year.
So how will this help ordinary Singaporeans?
Economists say the central bank’s move to allow the Singapore dollar to strengthen will help dampen price increases for ordinary people, although the impact will not be immediate.
Noting that the prices of daily necessities have risen and could rise further amid ongoing global supply chain disruptions and rising commodity prices, Mr Song said: “From the MAS’ point of view, it cannot let external prices fall, but All it can do is use the exchange rate to minimize higher import costs.
“It’s about keeping imported inflation in check as much as possible by helping the SGD stay strong against our major trading nations. So instead of an extra S$10, (consumers get) a small S$9 increase.”
That said, the effects of monetary policy adjustments will take time—from six to nine months in the future—to materialize.
“It doesn’t mean your grocery store is going to be 5% to 10% cheaper right away, because everything will be done in a deal or contract that was made months ago,” Mr. Song said.
“In the medium term, we would like to see prices stabilize or rise at a slower pace.”
The economist added that a stronger Singapore dollar could also mean a more favorable exchange rate for travelers heading overseas compared to other countries’ currencies.
“But that’s good news and bad news. Those who are travelling may enjoy a stronger SGD, but the flip side is that, given the rise in global inflation, everything from travel packages, insurance, to the items you buy. It’s become more expensive. Everything is more expensive now,” Mr Song said.
What happens next?
Economists said further tightening by the MAS could not be ruled out, with the central bank watching inflation trends and the economy’s first-quarter GDP performance.
“The MAS has clearly decided on the benefits of early action… However, this early action does not preclude further policy tightening at the April meeting,” said Nicholas Mapa, senior economist at ING.
“The MAS will closely monitor inflation trends in the coming months to see if more
Aggressive austerity will be necessary,” he added.
Selena Ling, head of treasury research and strategy at OCBC Bank, also said that given Tuesday’s move was only a “slight steepening” of the appreciation path of the MAS’ policy band, another steepening in April was “the path of least resistance … if inflation remains Broad base and persistence”.
“The key determinant will be whether core inflation peaks at around 3% and stabilizes, or whether private consumption remains very buoyant to drive car and accommodation prices higher and more to come in addition to imports. Domestic fees are adjusted for inflation,” Ms Ling added.
All eyes will also be on what higher inflation means for the planned increase in Goods and Services Tax (GST).
Prime Minister Lee Hsien Loong said the government will have to start plans to increase GST in the 2022 Budget as the economy emerges from the pandemic.
Economists at Moody’s Analytics said the latest inflation data “brings trouble to these plans”.
“GST is widely expected to be raised by 2023 at the latest in order for the government to balance its budget sheet,” Asia-Pacific economists Denise Cheok and Shahana Mukherjee said in a report released after the MAS policy decision.
“With prices already rising at a record pace, the timing of the GST hike needs to be carefully considered.”
