MAS goes for more aggressive Singdollar policy tightening as it raises inflation forecasts

MAS also raised its inflation forecasts, with core inflation now projected to come in at 2.5 per cent to 3.5 per cent this year. ST PHOTO: THADDEUS ANG

SINGAPORE - Singapore's central bank tightened its monetary policy on Thursday (April 14) for the third time since October in a double-barrelled move to combat inflation that is expected to heat up.

To allow the local dollar to strengthen against currencies of its trading partners, the Monetary Authority of Singapore (MAS) re-centred the midpoint of the exchange rate policy band at the prevailing level, and slightly increased the slope or rate of currency appreciation.

There was no change to the width of the policy band, a move the central bank usually takes when markets are volatile.

MAS’ dual moves are the first time since April 2010 that both tools were used at the same time to tighten policy. It comes after a tightening in October and a surprise off-cycle move in January. 

This is “a more aggressive move” than in October and January, Ms Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, said in a Bloomberg Television interview after the announcement, while Ms Sophia Ng, a currency analyst at MUFG Bank, told Bloomberg that “this is the most hawkish move that the MAS could undertake”.

The Singapore dollar jumped about 0.5 per cent to 1.3555 per US dollar immediately after the MAS move. It strengthened further to 1.3529 as of 1.15pm, up 0.7 per cent from Wednesday’s close. 

MAS also raised its inflation forecasts, with core inflation now projected to come in at 2.5 per cent to 3.5 per cent this year, from the 2 per cent to 3 per cent expected in January. Meanwhile, overall inflation is forecast at 4.5 per cent to 5.5 per cent, from the earlier range of 2.5 per cent to 3.5 per cent.

MAS said inflation will increase by more than previously anticipated because of the sharp gains in global commodity prices since late February and renewed supply chain disruptions brought about by both the Ukraine war and the Covid-19 pandemic - the latter a reference to lockdowns in China.

“The latest surge in energy and agricultural commodity prices will raise domestic inflation for electricity and gas, fuel and non-cooked food over the year. In turn, these will feed into higher transportation and food services costs,” it noted.

However, MAS stressed that its aggressive policy stance will help.

“This tighter 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.”

MAS said core inflation is likely to pick up sharply in the coming months, before moderating later this year, reflecting in part some stabilisation of commodity prices and possible easing of supply constraints.

A stronger currency helps absorb some of the inflation that seeps in with imported goods and raw materials. Imported inflation is the biggest source of price gains in Singapore, which virtually buys everything it consumes from overseas.

Hence MAS’ use of the Singapore dollar's exchange rate as a tool to achieve its mandate of medium-term price stability for sustained economic growth has been quite successful for decades.

Core inflation, which strips out accommodation and private transport costs, came in at 2.2 per cent year on year in February, shy of the 10-year high of 2.4 per cent a month earlier. Overall inflation increased to 4.3 per cent, up from 4 per cent in January.

Central banks around the world, led by the United States Federal Reserve, are raising interest rates to combat inflation supercharged more recently by surging energy and commodity prices after the Russian invasion of Ukraine, and the lockdowns in China in response to a Covid-19 resurgence.

The first-quarter 2022 economic growth came in at 3.4 per cent, with growth slowing slightly more than expected, according to data released by the Ministry of Trade and Industry (MTI) on Thursday morning. MTI’s 2022 gross domestic product (GDP) growth forecast stands at 3 per cent to 5 per cent.

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MAS said the overall prospects for global economic growth are uncertain and hinge on the evolution of the Ukraine conflict and regional pandemic situation.

“Nevertheless, at this juncture, aggregate demand growth in Singapore’s major trading partners is expected to ease somewhat but not be derailed given the buffer provided by savings and wealth accumulated in recent years,” it added.

Singapore is primarily an export-driven economy, with the bulk of value-add economic growth coming from the manufacturing and shipment of electronic goods such as semiconductors and their components.

That dependence on exports makes global demand a key determinant of the pace of GDP growth here.

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