News analysis

Stronger Singdollar likely on the cards next year

A more robust global economy has given Singapore businesses a much-needed shot in the arm this year, with growth expected to remain robust going into next year.

With the pace of economic expansion picking up both here and around the world, some economists are calling for a stronger Singapore currency to guard against rising inflation.

The central bank uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth.

The rate is allowed to float within a band that can be adjusted when monetary policy is reviewed.

A stronger currency - which corresponds to tighter monetary policy - counters inflation by making imports cheaper in Singapore dollar terms, while a weaker Singdollar helps lift growth by making exports cheaper abroad.

The exchange rate is managed against a basket of currencies of Singapore's major trading partners.

The Singdollar policy band is now on a path of zero appreciation against the currencies of key trading partners - a "neutral" stance put in place in April last year amid slow growth and low inflation.

The Singdollar policy band is now on a path of zero appreciation against the currencies of key trading partners - a "neutral" stance put in place in April last year amid slow growth and low inflation.

The Monetary Authority of Singapore (MAS) kept its policy unchanged at its review last month, and reiterated yesterday that this stance remains appropriate.

But economists say monetary policy tightening could be on the cards next year - possibly when MAS meets again next April.

For one thing, having a currency that is weaker compared with that of its trading partners could disadvantage Singapore importers as their purchases from abroad would cost more in Singdollar terms.

Also, strengthening growth overseas means imported inflation could be on the rise, especially if oil prices begin to recover as some market watchers expect.

A stronger currency would guard against this and help dampen inflation - which will also be under pressure from domestic factors.

"We think that inflation risks (could be rising), with measures such as the second phase of water price hikes in July 2018 (as well as the) reduction in the supply of COEs (certificates of entitlement). The potential imposition of the goods and services tax (GST) on e-commerce purchases may also raise consumer prices," said Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye. They expect MAS to tighten its policy in April.

UOB economist Francis Tan agreed that a potential tax hike could contribute to higher inflation next year.

 

Economists and tax experts expect the GST to go up within the next few years as the country's spending needs continue to grow.

"The consumption tax hike could be seen as timely by the Government, as the economy is growing better and expected wage growth could be higher in 2018," Mr Tan said.

"But that will also mean that inflation will... shift higher."

For now, MAS expects inflation to remain relatively low next year, coming in at between zero and 1 per cent - partly because conditions in the job market are improving more gradually compared with the wider economy.

But much depends on how the economy pans out in the months leading up to the central bank's April policy meeting.

A version of this article appeared in the print edition of The Straits Times on November 24, 2017, with the headline 'Stronger Singdollar likely on the cards next year'. Print Edition | Subscribe