Singapore’s central bank is taking a more aggressive approach, further tightening monetary policy on two fronts while raising its inflation forecasts, citing a fresh hit from global commodity prices and supply chains that is adding to domestic cost pressures.
The Monetary Authority of Singapore (MAS) said on Thursday (Apr 14) that it will “re-centre the mid-point of the S$NEER (Singapore dollar nominal effective exchange rate) policy band at its prevailing level”, while also “increasing slightly” the slope of the band. The width of the band was left unchanged.
This came in its latest monetary policy statement, which is typically released twice a year.
Over the last six months, however, the MAS has raised the slope of the band twice amid persistently rising inflation, including in an off-cycle move that surprised markets in January.
The MAS said: “A fresh round of shocks to global commodity prices and supply chains is adding to domestic cost pressures and will bring MAS core inflation to a significantly higher level than its historical average through 2022. Underlying inflation pressures remain a risk over the medium term.”
As such, the central bank has raised its core inflation forecast for this year to between 2.5 per cent and 3.5 per cent, up from the 2 to 3 per cent range it projected in January.
It also expects overall inflation to come in at between 4.5 and 5.5 per cent, up from the previous range of 2.5 to 3.5 per cent.
The MAS added: “The tightened monetary policy stance, which builds on the policy moves in October 2021 and January 2022, will slow the inflation momentum and help ensure medium-term price stability.”
Shortly after the MAS announcement, the Singdollar was seen firming to 1.3551 against the greenback just before 8.35am.
Nevertheless, the latest move from the MAS was not entirely out of line with economists’ expectations, some of whom had flagged the possibility of a “double-barrelled” move amid persistent inflation, although most of them had a steepening of the S$NEER slope as their base case.
Vishnu Varathan, head of economics and strategy for Asia and Oceania at Mizuho Bank, said: “Admittedly, the re-centring move is a tad more aggressive than our base case for a re-centring to a higher but below-prevailing S$NEER, but is compatible with the price shocks.”
Inflation has been running at near-decade highs in recent months, amid a deepening energy crisis and supply chain snarls that have been exacerbated by Russia’s invasion of Ukraine.
Headline inflation rose to 4.2 per cent in January and February from 3.7 per cent in the fourth quarter of last year; core inflation, which excludes accommodation and private transport, increased to 2.3 per cent in the same period, from 1.7 per cent in Q4.
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On Thursday, the central bank warned that inflation is likely to “pick up by more than previously projected” in the coming quarters, as global commodity prices have “risen sharply” since late-February and supply chains are again being disrupted by the war in Ukraine and the pandemic.
“The latest surge in energy and agricultural commodity prices will raise domestic inflation for electricity and gas, fuel and non-cooked food throughout the year. In turn, these will feed into higher transportation and food services costs,” the MAS said.
Strong demand for discretionary expenditure amid the release of pent-up demand could also lead to greater pass-through of business costs, said the MAS, which noted that the resident unemployment rate has fallen to pre-crisis levels and is expected to stay low.
“While the incoming non-resident workers will alleviate manpower shortages, the overall labour market will remain tight and support a firm pace of wage increases. The resulting rise in unit labour costs will be a key source of underlying inflation,” the MAS said.
Meanwhile, seasonally-adjusted gross domestic product (GDP) grew by 0.4 per cent on a quarter-on-quarter basis in the first quarter, easing from the 2.3 per cent expansion in Q4, according to advance estimates from the Ministry of Trade and Industry.
The MAS said the economic slowdown was “largely anticipated” and came on the back of a moderation in the manufacturing and modern services clusters, which had seen a strong performance in the preceding quarter.
Although global GDP growth was strong at the turn of 2022, the overall outlook for the global economy has “become more uncertain, contingent on the evolution of the conflict and the pandemic”, said the MAS.
“Nevertheless, at this juncture, aggregate demand in Singapore’s major trading partners is projected to slow but not derail, given the buffer from accumulated savings and wealth in recent years,” said the MAS.
Against this backdrop, Singapore’s trade-related and modern services sectors should expand at a more moderate pace this year compared to 2021, although the domestic-oriented and travel-related sectors should see a “step-up in their recovery” as Covid-19 measures are eased, added the MAS.
Given its “significant” upward revision to inflation forecasts, this might not be the last time the central bank raises the slope of the S$NEER this year, economists said.
Priyanka Kishore, head of India and South-east Asia economics at Oxford Economics, said: “We foresee further tightening this year by another 0.5 percentage point increase in the slope. We do not rule out this happening before October if price pressures continue to strengthen significantly in the near term.”
Mizuho’s Varathan said the MAS has joined a camp of central banks that have taken a more hawkish stance by front-loading their policy tightening.
“This so-called ‘Kokomo Club’ of central banks looking to ‘get there fast and then take it slow’ has necessarily tilted towards front-loaded tightening, marked by 50 basis point hikes,” he said, adding that the Bank of Canada and the Reserve Bank of New Zealand are “core” members of this club.
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