An Overview of Recent Measures and Their Implications
SINGAPORE: In response to rising inflation, the Monetary Authority of Singapore (MAS) tightened its monetary policy on Thursday (Apr 14) with a significant two-in-one action. This marks the third tightening in just six months and the most aggressive move to date.
While the tightening was anticipated due to ongoing inflationary pressures, the dual approach caught some analysts by surprise. MAS first adjusted its policy in October 2021, allowing the Singapore dollar to appreciate more rapidly by increasing the slope of its exchange-rate based policy band. This was followed by another adjustment in January, which surprised markets with an inter-meeting change.
In its latest policy statement, the MAS announced another slight increase in the slope of appreciation and re-centered the mid-point of the policy band to its current level. These measures are aimed at “slowing inflation momentum and ensuring medium-term price stability,” the MAS noted.
The width of the band, the third tool in MAS’ policy toolkit, remains unchanged and is typically used during periods of heightened uncertainty.
Q: How does MAS’ monetary policy function? MAS employs a unique approach to monetary policy by using the exchange rate as its primary tool, unlike most central banks that focus on interest rates. This is due to Singapore’s reliance on trade in its open economy.
The Singapore dollar nominal effective exchange rate (S$NEER) is managed against a basket of currencies weighted by trade. MAS allows the S$NEER to float within an unspecified band and intervenes by buying or selling Singapore dollars if it moves outside this band. Adjustments to the slope, width, and mid-point of the band help control the pace of appreciation or depreciation based on growth and inflation risks.
Q: Why is a third monetary policy tightening necessary? The need for tighter monetary policy stems from surging inflation, driven by a combination of factors, including global supply chain disruptions from the pandemic and the ongoing energy crisis exacerbated by Russia’s invasion of Ukraine.
While moderate inflation is a sign of economic health, excessive inflation diminishes consumers’ purchasing power and erodes corporate margins. Recent data indicates Singapore’s headline inflation rose by 4.3 percent in February, the highest in nine years. Core inflation, excluding private transport and accommodation costs, eased to 2.2 percent but is expected to rise again.
MAS has revised its inflation forecasts, expecting core inflation to range between 2.5 and 3.5 percent and overall inflation between 4.5 and 5.5 percent for 2022.
Q: How will the latest policy tightening address inflation? By tightening monetary policy, MAS effectively allows the Singapore dollar to appreciate, which makes imports cheaper. This is crucial for Singapore, which relies heavily on imports for most of its consumption, thereby helping to mitigate price increases for goods and services.
The latest tightening, particularly the re-centering of the policy band, is expected to strengthen the Singapore dollar, with analysts predicting an appreciation of 1.5 percent annually. Some estimates suggest that this could yield a maximum boost of 3 to 4 percent to the S$NEER in the coming months.
Q: What does this mean for you? While the central bank’s actions aim to curb inflation, the effects may not be felt immediately. Businesses often set prices based on prior agreements and contracts, so the impacts of monetary policy adjustments may take time to reach consumers.
Additionally, a stronger Singapore dollar will provide better exchange rates for those traveling abroad.
Q: What’s next? Economists are closely watching MAS’ next scheduled policy meeting in October, with expectations of further tightening. The MAS remains vigilant regarding external developments and their implications for the Singapore economy, highlighting ongoing inflationary risks.
The MAS has acknowledged that underlying inflationary pressures are still a concern, suggesting that the inflation outlook remains uncertain. Externally driven inflation, particularly in commodity and food prices, along with domestic cost pressures like labor and rent, will be critical to monitor in the coming months.
Some economists anticipate that MAS will steepen the slope of its policy band again in October, albeit at a more gradual pace. Others believe that unless inflation rises significantly, the current tighter stance will likely remain in place.
