MAS tightens Singdollar policy again in surprise move to slow inflation momentum

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SINGAPORE - The Monetary Authority of Singapore (MAS) again boosted its support for the Singapore dollar in an off-cycle policy decision on Thursday (July 14) to cool inflation, which is expected to rise faster than previously anticipated.

MAS said it will recentre the midpoint of its 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 said in a statement.

"This policy move, building on previous tightening moves, should help slow the momentum of inflation and ensure medium-term price stability," MAS said.

This is the fourth tightening move by MAS since October 2021, and the second time since January the central bank has moved ahead of a scheduled meeting. The next policy statement is due in October.

DBS Bank senior economist Irvin Seah said that with inflationary pressure likely to remain elevated, there is a strong impetus for MAS to tighten policy and anchor inflation expectations.

“However, it’ll be a delicate balancing act ahead for the authority.”

He explained that while a stronger Singapore dollar may keep imported inflation at bay, a shortage of labour will continue to fuel wage growth and likely stoke a second-order boost to inflation.

“The risk of a wage-price spiral exists, and hence the need to anchor inflation expectations. Whether the latest move will be sufficient to achieve that remains to be seen,” he said.

The Singdollar jumped against the US dollar immediately after MAS’ lastest tightening move. By 11.57am, it was trading at 1.3953 to the US currency, up 0.65 per cent from 1.4044 on Wednesday. For the year to date though, the Singdollar has fallen about 4.3 per cent against the greenback.

The US dollar has rallied this year as the Federal Reserve embarked on an aggressive series of interest rate hikes to fight soaring inflation. On Wednesday, the US reported that inflation had accelerated faster than expected to 9.1 per cent in June, the highest in 41 years. This raised bets that the Fed could raise rates by an unprecedented 100 basis points when it next meets on July 26 and  27. 

In Singapore, MAS has been on a path of gradual monetary policy tightening in view of the rise in underlying inflation and steady economic recovery. Prices of goods and services have surged amid supply disruptions due to the war in Ukraine and Covid-19 lockdowns in China.

MAS raised its core inflation forecast to between 3 per cent and 4 per cent this year, up from the earlier prediction of 2.5 per cent to 3.5 per cent. Core inflation is projected to rise slightly above 4 per cent in the near term, before easing towards the end of the year, it added.

“However, there remain upside risks to inflation from fresh shocks to global commodity prices and domestic wage pressures, MAS said. 

As car and accommodation cost increases are also likely to remain firm, headline inflation is expected to come in at 5 per cent to 6 per cent, higher than the earlier forecast range of 4.5 per cent to 5.5 per cent.

At the same time, the Singapore economy remains on track to expand at a creditable pace in 2022, though with slowing momentum, MAS said.

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