MAS allows for a stronger Singdollar on persistent Iran war-induced inflation risk

SINGAPORE – Singapore’s central bank has tightened its monetary policy stance for the second time in a row, allowing for a stronger currency in the face of the risk of relentless inflationary pressure from higher oil and natural gas prices due to the Iran war.

The Monetary Authority of Singapore (MAS) said on July 27 that it will increase “very slightly” the rate of appreciation of the Singapore dollar’s trade-weighted value, also called the Singapore dollar nominal effective exchange rate (S$NEER) policy band.

Unlike most central banks, which target interest rates, MAS uses S$NEER, which is a trade-weighted basket of currencies of Singapore’s major trading partners.

This is because, in a small and open economy such as Singapore – where gross exports and imports of goods and services are more than 300 per cent of GDP and almost 40 cents of every dollar spent domestically is on imports – the exchange rate has a much stronger influence on inflation than interest rates.

In its last policy announcement on April 14, MAS tightened its stance for the first time since 2022, allowing for a stronger S$NEER that helps dampen the impact of rising import costs.

MAS said the policy tightening in April, which followed a period of broad S$NEER appreciation, has contributed to a dampening of inflationary pressures in the economy.

“However, external price pressures are expected to persist and pass through more broadly to domestic consumer prices in the period ahead,” it noted.

MAS projects core inflation – which excludes private transport and accommodation to better reflect household expenses – to rise from July and remain elevated, but should moderate discernibly from around mid-2027.

Singapore’s core inflation ticked up to 1.6 per cent in June. It was higher than the 1.4 per cent in May, but remained at the lower end of MAS’ 1.5 per cent to 2.5 per cent forecast range for 2026.

However, as the central bank says, many analysts believe prices will remain elevated because of higher energy costs.

Sheana Yue, senior economist at UK-based research firm Oxford Economics, said MAS’ latest tightening reflects its focus on medium-term inflation risk rather than recent inflation outturns.

“Inflation has so far remained benign. But higher crude and refined fuel prices are likely to feed through into domestic fuel, freight and imported goods costs, keeping inflation risks tilted to the upside,” she said.

The global oil benchmark Brent has risen by more than 50 per cent since the start of 2026, touching the US$100 a barrel mark last week after a shaky 60-day ceasefire agreed between the US and Iran in mid-June collapsed.

A lull in hostilities over the weekend has helped lower oil prices to around US$96 a barrel. But analysts say higher energy prices will push up manufacturing and transport costs as they pass through global supply chains with a lag.

MAS said core inflation came in at an annual 1.5 per cent in the second quarter, up from 1.2 per cent in the January to February period before the outbreak of the Middle East conflict.

“Singapore’s imported costs are likely to rise in the quarters ahead. Higher fuel and electronic input costs will lift prices for upstream and intermediate items such as construction materials, capital equipment and food commodities,” it noted.

The trade-weighted S$NEER has stayed on its gradual appreciation path, guided by the MAS, in 2026.

But in the foreign exchange market, the Singapore dollar has eased by about 0.4 per cent against the US dollar.

However, its Asian peers have retreated much more against the greenback, helping the Singapore dollar gain some ground against them.

So far in 2026, the local dollar is up about 4 per cent against the yen and 0.6 per cent against the ringgit.

This means that Singaporeans can continue to enjoy the higher purchasing power of the currency in their most favoured holiday destinations of Malaysia and Japan.

For now, economic growth is not a worry for the central bank, which said the Singapore economy is forecast to record a firm pace of growth for 2026 as a whole.

The Singapore economy grew 5.7 per cent year on year in the April to June quarter, a decent pace but slower than the previous quarter’s 6.3 per cent – which was upgraded by 0.3 percentage point.

This took first-half gross domestic product growth to 6 per cent, a full 2 percentage points above the Ministry of Trade and Industry’s forecast range of 2 per cent to 4 per cent.

However, the strength of the economy in 2026 has been narrowly based on the artificial intelligence-powered semiconductor super-cycle, which has boosted exports and manufacturing output, generating some spillovers into other trade-related segments.

Some analysts worry that the non-electronics complex is not expanding as fast, signalling that the Republic’s expansion remains uneven despite robust GDP growth.

However, MAS in its latest Macroeconomic Review report, also issued on July 27, said the overall technology-related sector’s large economic weight and strong growth impulse could provide important second-round support to the broader economy.

This could include higher incomes in adjacent services, firmer business sentiment and improved confidence in the broader economic outlook.

Also, despite the onset of the Iran war late in the first quarter, activity in the domestically oriented industry as a whole was generally resilient in the second quarter, supported by favourable underlying domestic demand – reflected in strong credit growth and double-digit expansion of machinery and equipment investments.

The Macroeconomic Review report noted that the recently imposed Section 301 tariffs relating to forced labour would raise the effective tariff rate to 12.5 per cent on Singapore’s domestic exports to the US, but only marginally, as they replace the temporary 10 per cent global tariff imposed earlier in 2026.

Also, the adverse impact of the tariff would be cushioned by export diversification and the boom in tariff-exempt electronics exports.

Still, the MAS said, notwithstanding the higher costs of doing business, amid higher energy prices, unit labour costs in Singapore’s services sector are expected to increase at a subdued pace in 2026, as nominal wage growth has also eased from the firmer levels in 2025.

Meanwhile, domestic consumer spending appears to be turning more cautious amid the economic uncertainty.

Retail sales rose 3 per cent year on year to an estimated $4.5 billion in May, down from the 5.4 per cent growth recorded in April.

Hence, MAS said there continues to be significant uncertainty around the macroeconomic outlook.

“Inflation could pick up more strongly than anticipated if energy prices spike anew. Fuel reserves have been drawn down significantly and renewed supply disruptions in the Middle East could cause sharp surges in oil prices.”

Inflation could also be more persistent than projected if robust investment growth generates greater demand spillovers abroad and in Singapore.

At the same time, downside risks to the global and domestic economies remain.

An unexpected tightening in financial conditions or a pullback in AI-related investment could impact the sustainability of GDP growth, and thus weaken inflation, said MAS.

However, as things stand now, MAS said core inflation is likely to step up in July and remain elevated into early 2027, but stay within the projected range of 1.5 per cent to 2.5 per cent for the whole of 2026.

“Inflation should ease more discernibly in the second half of 2027 as global energy prices gradually moderate,” it noted.

Some analysts, including RHB Bank’s chief economist Barnabas Gan and Bank of America’s ASEAN economist Kai Wei Ang, said that if inflation is likely to stay elevated well into 2027, the MAS may have to further tighten its policy, possibly at the next quarterly meeting due in October.