MAS could further tighten monetary policy in October despite April's double tightening

SINGAPORE'S central bank could make a fourth adjustment to further tighten its monetary policy settings in the next 6 months, economists said, amid persistent inflation through 2022 that the authorities said could trend above the historical average.

This follows the Monetary Authority of Singapore's (MAS) decision on Thursday (Apr 14) to adopt a more hawkish stance to tighten monetary policy in 2 ways - its third move in 6 months - as well as an upward revision to its inflation forecast that economists said is "significant".

MAS will "recentre" the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at the prevailing rate as well as "increase slightly" the rate of appreciation of the band. There will be no change to the width of the policy band, according to its monetary policy statement, which is typically published half-yearly.

It also raised its headline inflation forecast to 4.5-5.5 per cent, from January's projection of 2.5-3.5 per cent. Core inflation, which excludes accommodation and private transport, is expected to hit 2.5-3.5 per cent, up from the earlier range of 2-3 per cent.

Accordingly, several economists also upgraded their inflation outlook. DBS raised its outlook for headline inflation to 4.6 per cent and core inflation to 3.3 per cent; and UOB, to 4.5 per cent and 3.5 per cent. OCBC said it had earlier raised its forecast to 4.2 per cent and 3.5 per cent respectively.

"The fresh shocks to global commodity prices and supply chains are adding to domestic cost pressures, and will bring MAS Core Inflation to a significantly higher level than its historical average through 2022," said MAS.

Noting overall growth prospects hinge on the evolution of the Russia-Ukraine war and regional pandemic situation, MAS said inflation in Singapore is likely to increase by "more than previously anticipated" in the quarters ahead.

The labour market is also expected to remain tight, with resident unemployment back at pre-crisis levels, and the resulting unit labour cost increases would be a "key source" of underlying inflation, it added.

"This tighter monetary policy stance, which builds on the policy moves in October 2021 and January 2022, will slow the inflation momentum and help ensure medium-term price stability," MAS said.

Although MAS' latest move was its most aggressive since April 2010, it was not altogether outside of economists' expectations, several of whom had warned of a possible double-barrelled move.

Investors also appeared to have been bracing for MAS' move, with several analysts noting that market reaction was fairly "muted". The US dollar fell against the Singapore dollar to a low of 1.3508 at 1.52pm before bouncing back, compared with about 1.361-1.362 before MAS' announcement.

"Prior to the MAS announcement this morning, the S$NEER had already been hugging the top end of its parity band, making another tightening move appearing somewhat inevitable," said OCBC chief economist Selena Ling.

Economists also noted that Thursday's move effectively undid the downward shift of the S$NEER policy band MAS made at the start of the Covid-19 pandemic in March 2020.

Citi economists believe the disappointing sequential growth in the first quarter, at 0.4 per cent, "likely necessitated a full reversal" of the policy easing 2 years ago.

In addition, "MAS' observation that the negative output gap had closed at end 2021 and should turn 'slightly' positive in 2022 imparted a greater urgency to immediately more than reverse the earlier 'double easing' in March 2020", Citi said.

The slope of appreciation was likely raised by 50 basis points (bps) to 1.5 per cent per annum, according to economist estimates, which is slightly milder than the 100 bps they had anticipated.

"The relatively measured slope increase suggests the MAS is still reluctant to take supply-side pressures into account in its assessment of the slope setting," Barclays economists said.

Still, market watchers said this may not be the last time the central bank is tightening monetary policy this year.

"We forecast further tightening this year by increasing the slope by another 0.5 percentage points. We do not rule out the possibility of this happening earlier than October if price pressures continue to be substantially strong in the near term," said Priyanka Kishore, head of India and South-east Asia economics at Oxford Economics.

UOB economist Barnabas Gan holds a similar view, noting that core inflation is expected to remain above 2 per cent this year.

"This is important especially because MAS views core inflation to be 'just under 2 per cent' as a level that is defined to be consistent with overall price stability," he said.