Singapore’s central bank tightened its monetary policy settings on Tuesday in its first out-of-cycle move in seven years, as global supply constraints and brisk economic demand elevate inflation pressures across the region.
The city-state’s trade-dependent economy is highly susceptible to swings in global inflation and the central bank’s sudden move comes as price pressures ring alarm bells for policymakers elsewhere in Asia.
The Monetary Authority of Singapore (MAS) “decided to tighten earlier rather than wait until the April review”, Sim Moe Siong, a currency strategist at the Bank of Singapore, said in a note on Tuesday.
The MAS’ willingness to tighten early also reflected the authorities’ optimism in the resiliency of economic expansion in the face of a perceived transitory drag from the Omicron Covid variant, Sim said.
“Given the hawkish shift, further tightening as part of measured steps to lean against inflation pressure seems likely in April,” he said.
Selena Ling, head of treasury research and strategy at OCBC, also said she expects the central bank to tighten again in April. She described the move on Tuesday as only a “slight tightening.”
“If they had announced a more aggressive tightening today, then that would have dampened expectations for April,” she said.
The MAS, which manages monetary policy through exchange rate settings, said it would slightly raise the rate of appreciation of its policy band.
The width of the band, known as the Nominal Effective Exchange Rate, or S$NEER, and the level at which it is centered will be unchanged.
Surprise Off-Cycle Move
The MAS last surprised with an off-cycle move in January 2015 when it eased its policy after a collapse in global oil prices.
Last year, many Asia-Pacific economies largely shrugged off inflationary threats that had rattled policymakers in Europe and the United States but that thinking now appears to be shifting.
Australia’s core inflation flew to its fastest annual pace since 2014 in the December quarter, data showed on Tuesday, challenging the central bank’s benign interest rate outlook.
In Japan, a country renowned for its stubbornly tepid price growth, policymakers have also acknowledged creeping inflation pressures.
Singapore Core Inflation Accelerates
Singapore’s policy move comes just a day after data showed core inflation in the city-state climbed in December by the fastest pace in nearly eight years.
“This move builds on the pre-emptive shift to an appreciating stance in October 2021 and is appropriate for ensuring medium-term price stability,” the MAS said, referring to its tightening move late last year.
The central bank is due to review its stance at a scheduled semi-annual policy meeting in April, when it was widely expected by economists to tighten again.
The Singapore dollar strengthened to 1.3425 versus the US dollar, its highest since October 2021.
‘Double Tightening’
Singapore’s bellwether economy is expected to grow 3-5%, unchanged from earlier forecasts.
“2022 will be year of double tightening for Singapore – both fiscal and monetary levers will grind tighter,” OCBC’s Ling said.
The MAS expects Singapore’s economic recovery, which has so far been led by the trade-related and services sectors, to extend to the domestic-oriented and travel-related sectors this year as Covid-19 restrictions are eased.
Singapore has vaccinated 88% of its 5.5 million people against Covid-19 and 55% have received booster shots.
Singapore’s Inflation Forecast
The MAS forecasts core inflation to be 2.0–3.0% this year, from the 1.0–2.0% expected in October. Headline inflation is expected to be 2.5–3.5%, from the earlier forecast range of 1.5–2.5%.
“While core inflation is expected to moderate in the second half of the year from the elevated levels in the first half as supply constraints ease, the risks remain skewed to the upside,” the MAS said.
Singapore will release its annual budget on February 18, when the government is expected to announce the timing for an anticipated hike in goods and services tax.
The city-state’s economy grew 7.2% in 2021, its fastest pace in over a decade, rebounding from a record 5.4% contraction in 2020. The government has spent more than S$100 billion over the last two years to cushion its economy from the impact of the pandemic.
Instead of interest rates, the MAS manages policy by letting the local dollar rise or fall against the currencies of its main trading partners within an undisclosed band.
It adjusts its policy via three levers: the slope, mid-point and width of the policy band.
- Reuters with additional editing by Jim Pollard
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