Budget 2022: Economists still see further monetary policy tightening in April despite GST hike delay

A FURTHER round of monetary policy tightening remains on the cards this April despite the Singapore government's decision to delay the Goods and Services Tax (GST) hike until next year, according to economists.

Barclays regional economist Brian Tan said the Monetary Authority of Singapore (MAS) would likely need to tighten monetary policy "more aggressively to contain demand-pull inflation pressures - especially as the government announced measures that would further boost wage pressures over the next few years".

Finance Minister Lawrence Wong on Friday (Feb 18) announced the government's plans to further tighten foreign labour supply alongside the rollout of the Progressive Wage Model for more sectors - retail, food services and waste management - over the next two years.

Meanwhile, the GST hike, up from the current 7 per cent rate, will happen in 2 steps: to 8 per cent in 2023, then to 9 per cent in 2024.

Tan noted that Wong's announcements at Budget 2022 came despite growing signs of labour shortages.

Singapore's unemployment rate in December was close to pre-pandemic levels 2 years ago. In September, job vacancies in the Republic rose to an all-time high of 98,700, according to data from the Ministry of Manpower.

At the same time, MAS is expecting core inflation to range from 2 per cent to 3 per cent this year, after it hit 2.1 per cent in December, prompting an off-cycle monetary policy tightening.

Officials said their forecast numbers do not take into account any GST hike, since the timing of the increase had not been announced when the forecast numbers were published.

Tan said that MAS is likely to view the GST hike as a "transitory administered price adjustment", which would not directly justify a further tightening of monetary policy. The concern would instead be the GST's possible indirect effects in triggering "second-round price effects", if it occurred in an already inflationary environment, he added.

MAS chief economist Edward Robinson told reporters last Thursday that the official gross domestic product growth forecast of 3 per cent to 5 per cent is a pace that will see output slightly exceed potential.

This official output gap projection suggests that a further tightening in monetary policy settings is warranted in April, said Tan, adding that he is expecting an "upward re-centring" of the Singapore dollar nominal effective exchange rate (S$NEER) policy band then.

But Mohamed Faiz Nagutha, Asean economist at the Bank of America, believes the delayed and staggered GST hike could lower market expectations for an upward re-centering move in April.

Instead, he sees a change in policy slope as more likely: "Policymakers have a medium-term price stability objective rather than offsetting near-term cost-push or policy-induced spikes."

He added: "Should MAS see evidence of front-loading of price increases in anticipation of the GST hike or wide-spread second round effects, an upward-reentering of the S$NEER policy band may also be appropriate - more so in the October policy than in April in our view."

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