On October 14, the Monetary Authority of Singapore (MAS), contrary to market expectations, tightened its monetary policy, stating that the move would help “ensure price stability over the medium term” amidst rising inflation.
In its semi-annual monetary policy statement, the central bank of Singapore announced that it would “slightly increase” the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, from the previous zero percent.
However, the width of the policy band and its center level will remain unchanged.
MAS stated: The path of appreciation for the S$NEER policy band will ensure medium-term price stability while also acknowledging the potential risks during the economic recovery.
It also added that in the coming quarters, Singapore’s economy is likely to remain above trend. As long as a resurgence of the COVID-19 pandemic globally is avoided or the pace of economic reopening is not affected again, “economic output should be able to return to normal levels around 2022.”
Meanwhile, MAS also noted that cost pressures from both domestic and international sources are accumulating, reflecting normalizing demand and tightening supply conditions.
Therefore, it projects that core inflation, which excludes accommodation and private transport costs, will rise to 1% to 2% next year and approach 2% in the medium term.
Among 13 economists surveyed by Reuters, 11 believed the central bank would maintain its existing monetary policy, while only two expected MAS to slightly tighten its monetary policy and normalize the new policy.
The tightened monetary policy moves MAS away from the “0%” appreciation rate policy implemented in March of last year due to the impact of the COVID-19 pandemic.
This also marks the central bank’s first monetary tightening since 2018. At that time, to allow for a “modest and gradual” appreciation of the Singapore dollar, the central bank had twice increased the slope of the S$NEER policy band in 2018.
Unlike most central banks that manage monetary policy through interest rates, MAS uses the exchange rate as its primary policy tool.
This refers to the Singapore dollar nominal effective exchange rate, which is the trade-weighted exchange rate of the Singapore dollar against its major trading partners.
The S$NEER is allowed to float within an unspecified band. If it goes outside this band, MAS intervenes by buying or selling the Singapore dollar.
When the central bank wants to adjust the rate of appreciation or depreciation of the local currency based on its assessment of Singapore’s economic growth or inflation, MAS will also change the slope, width, and midpoint of this band.
Following the announcement, the Singapore dollar strengthened slightly against the US dollar. At 9:16 AM on October 14, the Singapore dollar was last traded at 1.3490 against the US dollar.
Growth and Inflation Outlook
Preliminary data released separately on the morning of October 14 showed that Singapore’s economy grew by 6.5% year-on-year in the third quarter, a slowdown compared to the 15.2% growth in the previous quarter.
In its report, MAS stated that against the backdrop of strengthening external demand and recovering domestic spending, Singapore’s economy is expected to “maintain a steady pace of growth” in the coming quarters. The resilient electronics cycle and gradually improving business activities will support growth in trade-related and modern services sectors. MAS also added that as Singapore transitions to treating COVID-19 as an endemic disease, domestic-facing and travel-related sectors will also see some corresponding improvement.
MAS wrote: Barring tail risks such as vaccine-resistant virus strains or severe global economic stress, the Singapore economy should remain broadly on an expansion path. The slack in the labour market should also continue to be absorbed, and the negative output gap will close in 2022.
Meanwhile, core inflation, a key policy consideration for MAS, had already risen to 1.1% in August, the highest in two years.
This primarily reflects the rise in global commodity prices, which in turn has affected electricity and gas prices as well as inflation for non-cooked food items. The central bank stated that higher wage costs have also pushed up inflation for some domestic consumer goods, such as food and beverage services.
In the coming quarters, inflation is expected to see a “broad-based pickup,” driven by rising import costs, higher labor costs, and the recovery of domestic economic activity.
MAS mentioned: Amid strengthening global demand and persistent supply constraints, imported inflationary pressures are likely to persist for some time. On the domestic front, wage growth is likely to continue into next year as the slack in the labour market diminishes. As the domestic economy re-opens and private consumption recovers, accumulating business costs will be passed on to consumer price inflation. Increases in fees for services such as transport, healthcare, and education, which were put on hold due to the pandemic, could also be reinstated.
Private transport inflation may moderate next year due to a slower pace of increase in Certificate of Entitlement (COE) premiums and petrol costs. However, housing inflation is expected to remain firm amidst construction delays.
Therefore, MAS stated that overall inflation for this year is projected to be around 2%, and will average between 1.5% and 2.5% next year.
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