Jury is out on whether MAS will tighten monetary policy again in October

SINGAPORE’S central bank could further tighten monetary policy a fifth time in October if inflation continues to heat up, although some economists believe the likelihood may have diminished following its surprise move to frontload the tightening on Thursday morning (Jul 14).

The Monetary Authority of Singapore (MAS) said it will re-centre the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band up to its prevailing level with no changes to the slope and width of the band.

MAS said the latest move builds on previous tightening moves and “should help slow the momentum of inflation and ensure medium-term price stability”, even as it raised its core inflation forecast range to 3-4 per cent, from 2.5-3.5 per cent.

Within about 20 minutes of the off-cycle announcement, the US dollar (USD) saw a knee-jerk 1 per cent fall against the Singapore dollar (SGD) to a low of 1.3934, before recovering to cross the 1.40 mark again at about 4 pm.

Monetary policy is typically reviewed twice a year, but since October, MAS has already made 4 moves to change the S$NEER policy band settings, and the latest move is its second off-cycle one this year.

“We were not all that surprised to see another off-cycle tightening by the MAS as short-end rates have clearly signalled an intention to keep the currency on the stronger side. But we had expected the adjustment to happen after an inflation data release,” said Nicholas Mapa, senior economist at ING.

Singapore’s inflation data for June is slated for release on Jul 25.

RHB senior economist Barnabas Gan said Thursday’s move suggests that policymakers are increasingly worried about inflationary risks.

“The move to tighten, however, surprised us, given that there is ample headroom for the S$NEER to appreciate further, and inflation momentum is likely to ease towards year-end,” he said.

OCBC chief economist Selena Ling said the move to “arrest any inflation expectations shift early clearly signifies some policy resolve to tamp down imported inflation and likely puts the S$NEER positioning at a more comfortable level for the near term”.

MAS’s decision may also have been influenced by the recent weakness in the SGD, which fell to almost 1.41 against the USD on Wednesday night following the release of stronger-than-expected US inflation data, said Khoon Goh, head of Asia research at ANZ.

With the SGD likely to remain a “regional outperformer”, a stronger SGD should go some way to tame imported inflation. But analysts said expectations of yet steeper hikes by the Federal Reserve could constrain its performance against the USD.

Still, MAS’s tightening stance is likely to slow the ascent of the USD/SGD, said Peter Chia, senior FX strategist at UOB.

“Worth mentioning, the dip in USD/SGD post the last 3 MAS tightening exercises in October 2021, January 2022 and April 2022 was brief and lasted 1 to 5 trading sessions before the USD/SGD resumed its uptrend,” he added.

Meanwhile, some economists are warning of rising domestic inflation arising from the tight labour market, and DBS senior economist Irvin Seah said this is not something that an exchange rate-driven monetary policy - what Singapore uses - can fix directly.

“So what MAS is trying to achieve, in my opinion, is act early and basically allow the economic conditions to gradually equalise on its own - meaning, to anchor inflation expectations and let growth naturally slow down on its own,” Seah said. “Subsequently, with a slower growth momentum, the tightness in the labour market will also gradually dissipate.”

OCBC’s Ling said the question is whether other policy tools are needed, for example, to offer additional targeted help for vulnerable Singaporeans to cope with cost-of-living issues, and if there would be a policy response to the continued buoyancy in asset prices in Singapore.

As for MAS’s scheduled monetary policy review in October, Ling said how MAS moves would depend on whether global commodity prices stabilise further, if the Fed hikes 75 or 100 basis points (bp) at the upcoming Federal Open Market Committee meeting, as well as local labour market conditions.

Economists from ANZ, Barclays, Citi, ING, Oxford Economics, RHB and UOB are leaning towards a further tightening, with several of them predicting a 50 bp slope increase.

“Given the upward revisions to the MAS’s 2022 inflation forecasts, constructive economic growth going forward, and more aggressive frontloading by the Fed, we expect the MAS will tighten again at its next policy meeting in October,” said Sian Fenner, lead economist at Oxford Economics.

But MAS’s inflation forecast upgrade is also precisely why DBS’s Seah believes the likelihood of it moving in October has diminished.

“Now that MAS has already shifted up their inflation forecast, it takes a significant spike in core inflation and a marked improvement in growth for them to act again,” he said.

Maybank economists Chua Hak Bin and Lee Ju Ye concur, adding: “Our model suggests that the S$NEER is at about +0.7 per cent above the mid-point of the new re-centred band, with considerable room left for further appreciation.”