Iran war raises inflation risks, tips scales for MAS to go for stronger Singdollar in April: economists

[SINGAPORE] The escalating conflict in the Middle East and sharp rise in crude oil prices have tilted the odds in favour of the Monetary Authority of Singapore (MAS) tightening monetary policy at its review in April, analysts said.

Several economists now expect MAS to steepen the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at the meeting, in what would be its first tightening move since October 2022.

The next monetary policy statement will be released on or before Apr 14.

There is also potential for MAS to re-centre the policy band in subsequent policy meetings, in a mirror of its 2022 playbook, said Bank of America (BOA) economists Ang Kai Wei and Rahul Bajoria.

For such a scenario to happen, core inflation must stay at or above 2.5 per cent for a sustained period – a threshold the analysts estimate would be reached only if oil prices average US$95 per barrel over the next 12 months.

They added: “Higher oil prices would need to trigger a more pronounced and persistent broadening of price pressures. At present, we see more constraints on this second condition, with demand outlook far less supportive than in 2022, when pent-up demand played a major role.”

BOA now forecasts core inflation to be 1.3 per cent in the second quarter of 2026 and 1.8 per cent in the second half of the year.

The call is driven by concerns that elevated energy prices could feed into broader domestic inflation, given that crude oil prices have surged about 50 per cent since the US and Israel launched joint strikes on Iran on Feb 28.

In retaliation, Iran brought shipping in the Strait of Hormuz to an effective halt, threatening about a fifth of the global oil supply.

Brent crude oil crossed US$100 a barrel earlier this week, the first time it had done so since Russia’s invasion of Ukraine in 2022. Prices then retreated after, but crossed the US$100 mark again on Thursday (Mar 12).

Deputy Prime Minister Gan Kim Yong previously said that Singapore would reassess its growth and inflation forecasts if necessary. “Higher energy prices could lead to higher costs for businesses and consumers, and weigh on the global and Singapore economies,” he said.

Economists had already been expecting MAS to tighten monetary policy at either the April or July meeting, following the central bank’s decision to hold settings unchanged in January, when it also raised its core and headline inflation forecasts to 1 to 2 per cent for 2026.

The Middle East conflict has since reinforced that view, with the spike in oil prices adding urgency to concerns about imported inflation.

OCBC chief economist Selena Ling and senior Asean economist Lavanya Venkateswaran said in a note: “The benign global commodity price picture that underpinned MAS’ expectations that imported costs will be contained this year may be at risk...

“If this is sustained, it may mean MAS tightens monetary policy earlier rather than later.”

Policy winds shift

The shift in expectations follows a statement issued by MAS on Mar 2, in which it said it was monitoring developments in the Middle East and assessing the impact on the domestic economy and financial system.

The central bank added that the S$NEER “remains within its appreciating policy band, which will continue to dampen imported inflationary pressures”, and that it was “in an appropriate position to respond, if necessary, to risks to medium-term price stability”.

Several economists read the statement as a precursor to policy action at the April meeting.

“The MAS would likely focus on containing second-round inflation effects rather than reacting to a one-off oil shock,” said Afham Zulghafir, economist at CGS International Securities Malaysia.

“Given its exchange rate-based framework, the MAS could adjust the slope or level of the S$NEER band to limit imported inflation if price pressures broaden.”

In an earlier report, BOA analysts said they expect MAS to steepen the slope of the S$NEER band by 50 basis points (bps) to 1 per cent a year at the April meeting, and did not rule out a further 50 bps move in July if oil prices surge further.

The bank pointed to MAS’ policy decisions during the 2021 to 2022 inflationary surge, when it tightened monetary policy despite growth uncertainties, as a precedent for pre-emptive action.

UOB similarly expects a 50 bps steepening in April, estimating that every US$10-a-barrel increase in Brent crude could lift Singapore’s core inflation by 30 to 40 bps.

The bank now forecasts core inflation to rise to 1.5 per cent in 2026, up from 0.7 per cent in 2025.

However, it warned of the risk that any policy move could be delayed to the July meeting.

Standard Chartered chief economist Edward Lee, who was already calling for a steepening ahead of the conflict, reiterated his call for the central bank to tighten monetary policy settings.

Such a move would be a partial unwinding of the pre-emptive easing undertaken in H1 2025, when growth subsequently turned out stronger than expected.

Still, January’s weaker-than-expected core inflation figure of 1 per cent year on year – well below the Bloomberg consensus estimate of 1.5 per cent – has some economists believing that MAS could delay any move to July.

The figure was, however, partly dampened by one-off administrative factors and may not reflect the underlying inflation trend, analysts noted.

Said Lee: “We think MAS may still lean against inflation for now.”

Regional and global ripples

The conflict is also complicating the monetary policy outlook for central banks elsewhere. Unlike most central banks, which use interest rates as their primary monetary policy tool, MAS manages inflation through the exchange rate.

OCBC’s Ling and Venkateswaran noted that most central banks in the region are at or near the end of their easing cycles, and a sustained rise in oil prices could force them to reassess the room left for further rate cuts.

Separately, the US Federal Reserve, which meets on Mar 17 and 18, is widely expected to hold rates steady, with markets pricing in the first rate cut no earlier than June or July.

Oxford Economics chief US economist Michael Pearce said the oil price surge reinforces the case for the Fed to hold in the near term, though he still expects two 25 bps cuts later in the year.

Pictet Wealth Management analysts added that the Fed could postpone those cuts further, depending on the duration and severity of the conflict and its impact on inflation expectations.

Short-term US Treasury yields – a proxy for Fed rate expectations – have climbed towards 3.7 per cent, their highest since September, reflecting the shift in market sentiment, Swissquote senior analyst Ipek Ozkardeskaya noted.