MAS tightening monetary policy paves way for GST hike: economists
THE tightening of monetary policy is unlikely to delay the government's planned goods and services tax (GST) hike from 7 to 9 per cent, and may in fact pave the way for the raise by controlling inflationary pressures, said economists.
In a surprise move on Tuesday (Jan 25), the Monetary Authority of Singapore (MAS) raised the rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) slightly, while keeping its width and level unchanged.
As the move aims to tackle higher-than-expected inflation, one question might be whether the GST hike - which would mean higher prices - should be delayed to avoid contributing to inflationary pressures.
But economists do not see grounds for such a delay. Though the GST hike would have a transient inflationary impact, tighter monetary policy will help to cool overall inflationary pressures, and thus facilitate the hike, said DBS senior economist Irvin Seah.
"We see the move by the MAS - which is aimed at anchoring inflation expectations and buffering imported inflation - as paving the way for an eventual GST hike," he said.
OCBC chief economist Selena Ling similarly noted that Tuesday's pre-emptive MAS move "does give them some policy space at least on the monetary side".
Economists stressed the transient effect of a GST hike. While a hike this year would cause "potentially higher inflation", this would be in the form of a "one-time pass-through to consumer prices", said UOB economist Barnabas Gan.
"Given that this (GST hike) is expected to be a one-time price impact, this will not be considered as having an enduring impact on inflation, and in turn, the MAS is unlikely to tighten policy in response to a one-time GST increase."
Though the GST hike will have a permanent impact on prices, inflation is calculated on a year-on-year basis, so the new GST rate's impact on inflation will only last for 12 months, noted Seah.
Fundamentally, the fiscal consideration for a GST hike will not be overridden by inflation or monetary policy, said Ling.
Although MAS policy and GST hike matters are perceived to be related, it is important not to conflate the concerns of inflation with that of generating more revenue for the public purse, noted Eugene Tan, associate professor of law at the Singapore Management University.
"The inflationary pressures are trending and will be in the system for some time to come. Policymakers will have to tackle inflation even as they seek to find additional revenue streams for the government coffers," he said. "I don't foresee any significant change to the government's plans on the timing of the GST hike."
Tan said the question now is not on the necessity of the GST hike but rather how to go about doing it - for instance, incrementally or at once.
With core inflation forecast at 2 to 3 per cent this year, there may be a strong case for a gradual introduction of the GST hike so as to manage the inflationary pressures that accompany it, he added.
"While the timing of the hike is of the essence, there is no good time and so it may be that the government will opt to bite the bullet and avoid any inordinate delay to the hike," Tan said.
"It is clear that both inflation and GST concerns have to be managed well and in tandem to avoid stalling economic recovery."
Read more:
- MAS off-cycle move does not rule out further tightening in April, GST hike soon: economists
- Looking back at inflation in 2021
- 'Modest appreciation' of SGD against USD expected as MAS tightens monetary policy
