MAS policies and economic resilience bolster optimism for 2024, despite potential headwinds
SINGAPORE: For two consecutive years, the Singapore dollar has outperformed other Asian currencies, and it may achieve a “three-peat” in 2024, according to The Edge Singapore. This optimism stems from the Monetary Authority of Singapore’s (MAS) strategic approach to currency management in its fight against inflation.
In 2023, the Singapore dollar gained 1.5%, driven by MAS maintaining an appreciating bias in its policy band during its April and October meetings. Economists expect MAS to continue this stance into 2024, with the possibility of further tightening if inflationary pressures persist.
Brian Tan, Senior Regional ASEAN Economist at Barclays Bank, highlighted the growing risk of a 50 basis-point slope increase in MAS’s policy, citing “stickier-than-average” core inflation. Unlike most central banks, which adjust interest rates, MAS manages the Singapore dollar by influencing the slope, width, and mid-point of its nominal effective exchange rate (S$NEER) policy band.
Inflation and Economic Growth
Although core inflation has eased from 5.5% in February 2023 to 3.2% in November, it remains above the five-year average of 2%. This ongoing inflationary pressure supports the MAS’s inclination to maintain a strong currency policy.
Additionally, Singapore’s economy continues to display resilience. Government data revealed a 2.8% GDP expansion in the fourth quarter of 2023, surpassing economists’ forecast of 1.8%. This robust growth may provide further tailwinds for the Singapore dollar in the months ahead.
Challenges Ahead
However, not all experts are confident in continued outperformance. Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank, warned that while MAS’s settings may remain favorable, the Singapore dollar faces limitations. “With the S$NEER nudging up against the top end of the policy bands, sustained SGD outperformance is unlikely,” Varathan cautioned.
A recent policy change by MAS could also influence market dynamics. Beginning in October 2023, MAS increased its annual meetings from two to four, giving traders earlier insights into policy adjustments. The first such update is expected in January 2024, rather than the traditional April timeframe.
As the Singapore dollar navigates a complex landscape of inflation management and economic shifts, its trajectory in 2024 remains under scrutiny, with both optimism and caution shaping the outlook.
