MAS recentres mid-point of policy band again in bid to reduce imported inflation
THE Monetary Authority of Singapore (MAS) on Friday morning (Oct 14) announced it would “re-centre the mid-point” of the Singapore dollar nominal effective exchange rate (S$NEER) to its prevailing level, with no changes to the slope and width of the band.
“This policy shift, building on past tightening moves, will further reduce imported inflation and help curb domestic cost pressure,” said the MAS in its latest monetary policy statement, which is typically published twice a year in April and October.
“The policy stance will help dampen inflation in the near term and ensure medium-term price stability, providing the basis for sustainable economic growth,” it added.
This is the fourth time the MAS has tightened monetary policy in the past year, including off-cycle moves in January and July that surprised the market.
Shortly after the MAS’ announcement, the Singapore dollar rallied against the US dollar to 1.4240 by 8.15 am.
MAS expects core inflation to “likely stay around 5 per cent” for the rest of 2022, and into early 2023, on the expectation that the “confluence of demand and supply factors that drove the price increases in July to August is expected to persist”.
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“A tight labour market will support robust wage increases, while imported inflation will remain significant across a range of intermediate and final goods,” it added.
Core inflation is expected to average around 4 per cent for 2022, and headline inflation around 6 per cent.
For 2023, MAS expects core inflation to come in at 3.5 per cent to 4.5 per cent; headline inflation is expected to come in at 5.5 to 6.5 per cent.
“Although the one percentage point increase in the GST (goods and services tax) will result in a one-off step-up in the price level, its effect on inflation should be transitionary,” said MAS.
MAS’ latest move surprised some economists who were expecting a more aggressive “double-barrelled” tightening move, in which the S$NEER policy band will both have its slope steepened and band be recentred higher.
“The MAS, somewhat surprisingly, left the slope unchanged, which leads us to now believe that the slope is an estimated 2.5 per cent, not 1.5 per cent,” said Barclays economist Brian Tan, who added that the latest decision “confirms our view that core inflation had likely overshot the MAS’ forecasts”.
Nevertheless, Vishnu Varathan, head of economics and strategy for Asia and Oceania at Mizuho, said the MAS is “fully justified in not over-tightening, especially given gathering headwinds”. The mild shortfall of hawkish expectations, combined with the authorities’ caution on the downside in aggregate demand risks will help to contain the “knee-jerk” S$NEER or extrapolated Singapore dollar gains from the tightening.
Gross domestic product (GDP) rose 1.5 per cent on a quarter-on-quarter seasonally adjusted basis in Q3, reversing the 0.2 per cent contraction in Q2, according to advance estimates by the Ministry of Trade and Industry.
MAS expects that in the quarters ahead, “the drag on economic activity from the globally synchronised tightening in monetary policy will intensify”.
“While inflation should moderate, it will remain high for some time. At the same time, growth in Singapore’s major trading partners will slow to below trend but stay positive in 2023,” it added.
Further shocks, including from geopolitical tensions, could drive inflation higher and cause recessions in some key economies, MAS warned.
Against this backdrop, prospects for Singapore’s manufacturing sector and some trade-related services have dimmed. “Nevertheless, growth in the Singapore economy should be sustained by continuing expansions in the domestic-oriented and travel related sectors, underpinned by strong household balance sheets and wage incomes,” MAS said.
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