The Monetary Authority of Singapore (MAS) says it will re-centre the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band up to its prevailing level.
There will be no change to the slope and width of the band, the central bank announced on Oct 14.
The policy shift will help to further reduce imported inflation and curb domestic cost pressures. The stance will also help to dampen inflation in the near term and ensure price stability in the medium-term, says MAS.
MAS had re-centred the mid-point of the S$NEER policy band to the then-prevailing level in July with no changes to the slope and width of the band. At the time, the central bank said that it was “prudent” to tighten its monetary policy further and “lean against price pressures becoming more persistent”.
Since then, the S$NEER has broadly appreciated and is now close to the top of the policy band, says MAS. The three-month S$ Singapore Interbank Offered Rate (SIBOR) rose to 3.4% from 2.5% in July, while the Singapore Overnight Rate Average (SORA) increased to 3.4% from 2.1%.
Inflation expected to remain high
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In its outlook statement, the MAS says it expects inflation to remain high in most of Singapore’s key trading partners in the near term while global growth moderates.
“The Singapore economy will grow at a slower pace in tandem with weakening global demand. However, core inflation will stay elevated over the next few quarters, as imported inflation remains significant and a tight labour market supports strong wage increases,” reads the Oct 14 statement released by MAS.
The central bank adds that inflation is projected to ease more discernibly in the latter half of 2023, although there is “considerable uncertainty around the outlook for both inflation and growth”.
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“In the quarters ahead, the drag on economic activity from the globally synchronised tightening in monetary policy will intensify,” continues MAS. “While inflation should moderate, it will remain high for some time.”
At the same time, growth in Singapore’s major trading partners will slow to below trend but stay positive in 2023, it predicts. However, further shocks, including from geopolitical tensions, could drive inflation higher and cause full-year recessions in some key economies.
On this, the prospects for Singapore’s manufacturing sector and some trade-related services have dimmed with the growing weakness in electronics production and its supporting industries likely to persist.
“Nevertheless, growth in the Singapore economy should be sustained by continuing expansions in the domestic-oriented and travel-related sectors, underpinned by strong household balance sheets and wage incomes,” says MAS. “However, the pace of discretionary spending could moderate over the course of 2023, with sentiment softening alongside mounting global growth risks.”
Price increases expected to persist
The confluence of demand and supply factors that drove the increases in price from July to August is expected to persist, says MAS.
A tight domestic labour market will support robust wage increases, while imported inflation will remain significant across a range of intermediate and final goods.
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MAS Core Inflation, which excludes the costs of accommodation and private transport rose to a higher-than-expected 4.9% y-o-y in July to August.
“In the coming year, costs pressures which have been accumulating along domestic and global supply chains will continue to pass through to consumer prices,” says MAS. “Even as prices of energy and food commodities have moderated from their peaks, businesses will face higher utility and raw material costs as contracts are renewed.”
MAS continues: “The pace of domestic unit labour cost increases should ease over the course of 2023, as labour demand and supply rebalance, but remain above its historical average.”
MAS core inflation likely to stay around 5% for rest of 2022
In its statement, MAS says the MAS Core Inflation is likely to remain at around the 5% level for the rest of 2022 and into early 2023.
“Although the one percentage point increase in the GST will result in a one-off step-up in the price level, its effect on inflation should be transitory,” it says.
Core inflation is also expected to remain high in the 1H2023 before “slowing more discernibly” in the second half as cost pressures gradually ease.
For 2022 as a whole, MAS Core Inflation will average around 4% and CPI-All Items inflation around 6%.
In 2023, taking into account all factors including the GST increase, MAS Core Inflation should come in at 3.5%–4.5% on average over the year, and CPI-All Items inflation at 5.5–6.5%.
However, even excluding the one-off effects of the GST increase, core inflation would remain above trend at 2.5%–3.5% and headline inflation at 4.5%–5.5%. Furthermore, there are upside risks to these forecasts, including from fresh shocks to global commodity prices and second-round effects associated with a prolonged period of high inflation.
