MAS to 'raise slightly' rate of appreciation of policy band
THE Monetary Authority of Singapore (MAS) tightened policy on Tuesday (Jan 25) by raising slightly the rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, after it raised its inflation forecasts for 2022.
The "pre-emptive adjustment" comes after MAS tightened its monetary policy settings in October 2021, to account for external and domestic cost pressures. Then, it had shifted the S$NEER policy band to a gradual appreciation path from zero per cent.
MAS's monetary policy stance is typically announced to the public every 6 months in April and October, making the move an off-cycle one.
The move rattled the market, with the benchmark Straits Times Index down 0.6 per cent or 18.82 points to 3,264.53 within a minute of trading having begun, before climbing back up through the hour. The Singapore dollar also rose to a three-month high against the US dollar at 1.3438.
The current move is "appropriate for ensuring medium-term price stability", MAS said in its monetary policy statement (MPS) on Tuesday (Jan 25). Just like in October, the width of the policy band and the level at which it is centred will be kept unchanged.
MAS raised core inflation forecasts to between 2 and 3 per cent this year, from between 1 to 2 per cent forecasted in October last year. Meanwhile, forecasts for the Consumer Price Index (CPI) all items inflation were raised to be between 2.5 and 3.5 per cent, from an earlier range of between 1.5 to 2.5 per cent.
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It noted that price increases across a broad range of goods and services have been stronger than forecasted: this includes rising energy prices, high imported food inflation amid regional supply disruptions and high CPI for airfares. The resident unemployment rate has also returned to pre-pandemic levels, MAS said.
MAS expects core inflation will pick up in the near term due to rapidly accumulating external and domestic cost pressures, and reach 3 per cent before moderating. It should moderate in the second half of the year as supply constraints ease, but "the risks remain skewed to the upside".
Cost increases may also lead to higher services prices amid rising private consumption, while car and accomodation cost increases may drive an increase in the CPI all items inflation. Meanwhile, the domestic labour market will likely continue to tighten and lead to strengthened wage pressures.
But barring fresh disruptions, MAS still expects the Singapore economy will grow between 3 to 5 per cent this year.
OCBC chief economist Selena Ling said the central bank's move "should not really have surprised the market" especially after the "rather cryptic" inflation statement on Monday that MAS and the Ministry of Trade and Industry were reviewing their 2022 headline and core inflation forecasts.
Vishnu Varathan, head of economics and strategy for Asia and Oceania at Mizuho Bank, said the "front-loaded and pre-emptive, not panicked, slight S$NEER slope increment" that anchors expectations alongside the raised inflation forecast may be "optimal policy balance".
"From here, the default is for a hold at the April meeting - with potential for calibrated slope increment in October - given this off-cycle move is meant to front-load," he said. "However, if inflation continues to surprise the upside significantly - notably core inflation sharply exceeding 3 per cent - then the MAS may be compelled into another round of tightening at or around the April meeting."
Noting that Tuesday's move is only a "slight steepening" of the appreciation path for the S$NEER policy band similar to the October 2021 move, Ling said: "The path of least resistance may be another potential slope steepening come April MPS if inflation remains broad-based and persistent than what has been priced in currently."
She added that the key determinant would be whether core inflation peaks at the 3 per cent handle and stabilises, or if private consumption remains very buoyant to drive car and accommodation prices higher, and if more domestic fee adjustments arise down the road, in addition to imported inflation.
Mohamed Faiz Nagutha, Asia and Asean economist at the Bank of America, also believes a slope change in April could be on the cards.
"Given the 'slight' adjustment in slope today, we expect another 50-basis point increase in the slope to 1.5 per cent in the April policy meeting," he said. "Should the inflation outlook continue to shift higher, chances of an upward re-centering will go up. The potential hike in GST, expected to be announced in the February Budget and likely to take effect from July, will have no direct implications for monetary policy in our view."
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