MAS strengthens Sing$ in move to combat inflation

Singapore has decided to strengthen its currency in an effort to fight off inflation, even as latest data showed that the economy's growth momentum has slowed.

In its most aggressive response to the risk of relentless price hikes, which have loomed since late last year, the Monetary Authority of Singapore (MAS) yesterday provided more room for the Singdollar to appreciate more sharply against currencies of its major trading partners.

It did so by recentring the midpoint of the exchange rate policy band and steepening the slope, or the rate of currency appreciation.

The MAS' dual moves yesterday are the first time since April 2010 that both tools have been used at the same time to tighten its exchange rate-led monetary policy. It builds on a tightening in October and a surprise off-cycle move in January.

The Singapore dollar jumped about 0.5 per cent to 1.355 per US dollar immediately after the MAS move early yesterday. It strengthened further to hit a high of 1.351, the strongest level since Feb 25.

Mr Irvin Seah, senior economist at DBS Bank, said the tighter policy stance could pave the way for the Singapore dollar to rise as high as 1.35 versus the US dollar on a trade-weighted basis.

However, with the US Federal Reserve also expected to tighten its monetary policy, the US dollar may strengthen as well and pull the Singapore dollar down to around 1.39 by the third quarter.

The Singapore dollar strengthened against the Malaysian currency as well - fetching 3.12 ringgit compared with 3.1 ringgit on Wednesday.

Ms Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, said: "The more aggressive tightening by MAS was attributed to a substantially higher than expected uptick and persistence in inflationary pressures."

The MAS also raised its inflation forecasts. Core inflation is 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 flagged in January. Overall inflation is forecast to rise by 4.5 per cent to 5.5 per cent, from the earlier range of 2.5 per cent to 3.5 per cent.

The MAS attributed the expected hike to the sharp gains in global commodity prices since late February and supply chain disruptions brought about by both the Ukraine war and the Covid-19 pandemic - a reference to lockdowns in China.

However, it 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."

A stronger currency helps absorb 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.

The MAS' use of the Singapore dollar's exchange rate to achieve medium-term price stability for sustained economic growth has worked for decades.

However, gross domestic product (GDP) growth for the first quarter of this year came in at 3.4 per cent, less than the 3.8 per cent forecast by economists in a Bloomberg poll.

The GDP data released by the Ministry of Trade and Industry (MTI) yesterday showed growth in the key manufacturing sector dipping 1.2 per cent on a quarter-on-quarter seasonally adjusted basis - the first decline after four consecutive quarters of expansion.

MTI and the MAS, however, maintained the full-year 2022 growth forecast at 3 per cent to 5 per cent.

Mr Jeff Ng, senior currency analyst at MUFG, said domestic-oriented sectors are likely to benefit from easing of Covid-19 measures.

Most analysts believe the MAS appears to be more concerned about the underlying price pressures over the medium term, and that might lead to another tightening move in October.

"The MAS stated it will also remain vigilant to developments in the external environment and their impact on the Singapore economy, potentially signalling that the tightening window is not completely closed yet," said Ms Ling.