A rise in inflation levels amid fresh shocks to global commodity prices and supply chains has pushed the Monetary Authority of Singapore (MAS) to further tighten its monetary policy settings.
What this means is that the mid-point of the exchange rate policy band at the prevailing level of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) has been re-centred, the central bank announced on April 14.
It added that the policy band has been raised slightly to “exert a continuing dampening effect on inflation”. However, the width of the policy band has been kept unchanged.
The tighter monetary policy position – which follows the pre-emptive shift to an appreciating stance in October 2021 as well as the out-of-cycle tightening in January – comes as underlying inflationary pressures remain a risk over the medium term.
Thus, the latest move looks to “slow the inflation momentum and help ensure medium-term price stability,” MAS explained.
Headline inflation – which reflects the total inflation in the economy – had increased to 4.2% y-o-y in January and February, from 3.7% in 4Q2021.
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This follows “rising electricity & gas as well as non-cooked food inflation driven by higher global oil and food prices at the turn of the year,” MAS noted.
It added that inflation for discretionary goods and services had also stepped up as household spending firmed and businesses passed on the higher costs to consumers.
Going forward, the central bank expects Singapore’s consumer price inflation to “increase by more than previously anticipated” as the higher prices are expected to drive up transportation and food services costs.
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As such, core inflation is forecast to pick up sharply in the coming months before moderating in late 2022 thanks to a stabilisation of commodity prices and a possible easing of supply constraints.
Meanwhile, global inflationary pressures and a tight domestic labour market are expected to continue creating an upward pressure on core inflation over the medium term.
“These are distinct from the one-off impact of the GST increases, which will be cushioned by targeted fiscal measures, and do not require a monetary policy response,” the central bank explains.
Core inflation – which reflects the total level of inflation excluding accommodation and transportation costs – is expected to come in between 2.5% and 3.5%, while headline inflation is penciled at 4.5% to 5.5%.
Several economists have since upgraded their inflation targets for this year.
For one, DBS Bank’s senior economist Irvin Seah upgraded both his headline and core inflation outlook to 4.6% and 3.3% respectively. UOB Bank’s Barnabas Gan similarly raised his target for headline inflation to 4.5% and core inflation to 3.5%.
Meanwhile, OCBC Bank had previously raised its forecast for headline inflation to 4.2% and core inflation to 3.5%.
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"Prior to the MAS announcement [on Apr 14] the S$NEER had already been hugging the top end of its parity band, making another tightening move appearing somewhat inevitable," noted Selena Ling, chief economist at OCBC Bank.
Several economists also pointed out that the latest move had effectively undone the downward shift of the S$NEER policy band that the MAS had taken on at the start of the pandemic in March 2020.
Economists from Citi believe that this follows the “disappointing sequential growth” in 1Q2022 at 0.4% which “likely necessitated a full reversal” of the policy easing adopted two years ago.
“MAS' observation that the negative output gap had closed at end 2021 and should turn 'slightly' positive in 2022 imparted a greater urgency to immediately more than reverse the earlier 'double easing' in March 2020",” they add.
Market watchers estimate that the slope of appreciation of the S$NEER band is raised by 50 basis points (bps) or 1.5% per annum, which is slightly milder than the 100 bps they had anticipated for the latest macroeconomic review.
However, this is unlikely to be the last time that the central bank is tightening monetary policy settings this year.
“Being vigilant to global) developments is a pre-condition as geo-political, pandemic and global policy tides strike the resilient outlook for growth (3-5%); which is slightly diminished but not derailed. Further S$NEER slope increment remains “live”, but highly fluid, into the October meeting,” explains Vishnu Varathan, head of economics and strategy at the Asia & Oceania Treasury department of Mizhou Bank.
Agreeing, Priyanka Kishore who heads the India and Southeast Asia economics team at Oxford Economics is looking at a further tightening this year. She is looking at the slop being increased by another 0.5 percentage points.
“We do not rule out the possibility of this happening earlier than October if price pressures continue to be substantially strong in the near term,” she explains.
UOB’s Gan has the same view as Varathan and Kishore since core inflation is expected to remain above 2% this year. This is concerning since the MAS’ view is that a core inflation level that is under 2% is consistent with overall price stability, noted Gan.
