MAS keeps Singdollar appreciation rate unchanged but warns of elevated inflation

SINGAPORE – Singapore’s central bank maintained its monetary policy stance, but warned that persistent energy price pressures from the Iran war will keep inflation elevated well into 2027.

The Monetary Authority of Singapore (MAS) said on Oct 14 that it will keep unchanged 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’s – where gross exports and imports of goods and services are more than 300% of gross domestic product (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.

MAS said: “The current appreciating policy band will allow the S$NEER to continue to strengthen and lean against the anticipated near-term rise in imported inflation, ensuring the gradual easing of inflationary pressures in 2027.” 

Faced with sticky inflation amid an unresolved energy shock from the Iran war, MAS has tightened its policy stance twice in 2026 – in April and July – allowing for a stronger S$NEER that helps dampen the impact of rising import costs.

Global crude oil benchmark Brent was trading around US$106 a barrel on Oct 14, up more than 70% since the start of the year, as supplies from the Middle East remained constrained amid the Iran war and the conflict between top oil exporter Saudi Arabia and Yemen.

“Since September, energy commodity prices have risen anew and are projected to remain high in the near term,” said the central bank.

Global and regional food prices are also expected to pick up as costlier inputs and adverse weather patterns impact food production.

Firming imported cost pressures in Singapore will keep core and all-items inflation at the current slightly elevated levels in the months ahead, MAS said.

Core inflation, which excludes the costs of accommodation and private transport from all-items inflation, rose to 2.1% on the year in July to August, from 1.5% in the second quarter.

For 2026 as a whole, core inflation is forecast to average 1.5% to 2%, while all-items inflation should come in around 2%. This is lower than MAS’ July forecast of 1.5% to 2.5% for both core and all-items inflation.

MAS said inflation should ease more discernibly in the second half of 2027 as global energy prices gradually moderate. But with inflation running high all the way to mid-2027, both core and all-items inflation are projected to average 1.5% to 2.5% – higher than the historical average of 1.5 per cent.

Charu Chanana, chief investment strategist at Danish investment bank Saxo, said MAS’ decision to leave policy settings unchanged was a surprise relative to market expectations. However, the pause should not be seen as a pivot.

“After two rounds of tightening in 2026, policymakers appear comfortable giving earlier measures more time to work rather than responding aggressively to every inflation risk,” Chanana said.

DBS Bank’s senior economist Chua Han Teng said the pause likely reflected a softer-than-expected 2026 inflation outlook, with MAS lowering the top end of its previous forecast.

However, the relatively higher projection for 2027 alludes to the persistent risk of energy prices remaining volatile for longer.

“MAS likely kept the door open for another calibrated tightening if needed,” he said.

For now, economic growth is not a worry for the central bank, with strong demand for Singapore’s AI-related exports, such as semiconductors, and an increase in production capacity across the technology sector.

In its quarterly Macroeconomic Review report, also released on Oct 14, MAS said technology-related sectors have accounted for around 75% of overall growth.

While there was some moderation in electronics output growth in early third quarter, it said this likely reflected capacity constraints in the global supply chain as underlying AI-related demand remained firm.

The Ministry of Energy, Trade and Industry’s (METI’s) advance estimates released on Oct 14 showed Singapore’s overall GDP grew by 5.4% year on year in the third quarter. In August, METI projected Singapore’s GDP to grow 4.5% to 5.5% in 2026.

MAS said: “The Singapore economy is expected to continue expanding steadily in the quarters ahead.”

However, the central bank believes that the pace of AI-related activity is then projected to moderate in the latter half of 2027, even as the construction of major infrastructure projects as well as financial services activity continue apace.

METI will update its GDP growth forecasts for 2026 and release its maiden 2027 projection in November.

However, MAS warned of an additional risk: tighter financial conditions, which could become a hurdle for economic growth. Tighter financial conditions refers to higher borrowing costs and diminishing access to loans for investments, mortgages, credit cards and car loans.

Following the US central bank’s first rate hike since 2023 in September, US sovereign bond yields have risen to multi-decade highs, pushing up interest rates on bonds across the world, including in Singapore.

In its Macroeconomic Review report, MAS said that while Singapore’s financial conditions have tightened slightly amid rising interest rates, they continue to trade at a discount to US rates.

Still, higher global rates could expose underlying vulnerabilities, particularly where elevated borrowing costs interact adversely with stretched global equity valuations and weaker earnings, MAS warned.

“A renewed geopolitical shock or material shortfall in AI investment returns could amplify these pressures, triggering a broader reassessment of valuations and sharper corrections across financial markets.”

For now, MAS added, bank lending to resident consumers and businesses in Singapore continues to rise strongly on the back of robust trade-related growth, as well as firm expansions in financial and insurance activities.