Singapore moves to rein in inflation; growth loses steam

Singapore has stepped up its efforts to rein in rising prices by allowing its currency to strengthen.

The move risks further dampening growth prospects in its export-driven economy, which is already losing momentum as major economies slow worldwide.

The Monetary Authority of Singapore (MAS) made room for a stronger Singapore dollar by further tightening its policy yesterday. It also raised its inflation forecasts for the year, though it hopes that the move will check rising prices by making imports cheaper.

Meanwhile, Singapore's gross domestic product (GDP) grew a disappointing 4.8 per cent year on year in the second quarter, said the Ministry of Trade and Industry (MTI). While growth in the second quarter was higher than the revised 4 per cent in the first quarter, it was weaker than the 5.4 per cent economists had expected in a Bloomberg poll.

Compared with the first quarter and on a seasonally adjusted basis, the economy posted zero growth in the second quarter, suggesting a significant loss of momentum.

Analysts said disappointing growth data and MAS' surprise move show policy emphasis may have shifted to fighting surging inflation rather than boosting growth.

There was sobering news from the United States too, where a jump in inflation raised the prospect of another large interest rate hike, which could hit growth further.

MAS cautioned that Singapore's GDP growth may moderate further next year, in tandem with a weaker global econo-mic environment.

MTI had maintained its 3 per cent to 5 per cent growth forecast for 2022 in April, but warned it will likely come in at the lower half of the forecast range.

OCBC Bank chief economist Selena Ling said the flatlining quarter-on-quarter growth marks the slowest three-month period since the first quarter of 2020, which was the start of the Covid-19 pandemic.

"Looking ahead, growth momentum may moderate further, given recession and hard landing fears for the US, euro zone and China that are clearly weighing on business and consumer confidence at this juncture," she said.

Supply disruptions due to the war in Ukraine and Covid-19 lockdowns have boosted inflation worldwide.

MAS said core inflation may come in at between 3 per cent and 4 per cent this year, up from the earlier forecast of 2.5 to 3.5 per cent. The central bank has been steadily tightening its monetary policy and allowing the Singdollar to strengthen to make imports cheaper. Still, prices have continued to surge beyond its forecasts.

Ms Ling said MAS' second offcycle move this year illustrates the heightened challenges global central banks are facing. The question is whether inflation will peak towards the end of the year or whether there will be fresh shocks.

She said that even if demand cools with aggressive monetary policy tightening, costs may continue being passed on to consumers, keeping prices high.

DBS Bank senior economist Irvin Seah said that while a stronger Singapore dollar may keep imported inflation at bay, a shortage of labour will continue to fuel wage growth. The higher costs to businesses may stoke inflation further.

Mr Lam Yi Young, chief executive of the Singapore Business Federation, said the reopening of borders has improved sentiments for most businesses. "But many are also concerned about the increase in downside risks due to rising inflation and interest rates, as well as the war in Ukraine," he said.

Mr Ang Yuit, vice-president of the Association of Small and Medium Enterprises, said the risk of recession in the US and Europe comes on top of supply chain frictions from the war in Ukraine and China's Covid-19 lockdowns.

"While the war and the lockdowns have boosted costs for businesses, they are also facing the pressure of rising wages due to a still-tight labour market," he said.

Mr Ang added that if major economies go into recession and high inflation still requires a stronger Singapore dollar, businesses fear that exports may become less competitive.