MAS tightens monetary policy ‘very slightly’ in July, defying expectations for a hold

[SINGAPORE] The Monetary Authority of Singapore (MAS) on Monday (Jul 27) tightened monetary policy “very slightly”, raising the rate of appreciation of its Singapore dollar nominal effective exchange rate (S$NEER) policy band and defying expectations for a hold.

The central bank said firmer growth and building medium-term inflation risks warranted further restraint, even though recent inflation data has stayed benign.

It said the increase was smaller than April’s steepening, with no change to the width of the band or the level at which it is centred. The move defied a Reuters poll in which 12 of 16 economists had expected a hold.

“This calibrated adjustment to the policy stance builds on the tightening in April,” MAS said. “It sustains an appropriate appreciation path for the S$NEER policy band which will cap inflationary pressures.”

At the April meeting, MAS tightened monetary policy settings by increasing the rate of appreciation of the S$NEER policy band, in response to the conflict in the Strait of Hormuz and the sharp rise in oil prices as a result. This was its first tightening move since October 2022.

Oxford Economics senior economist Sheana Yue said the latest move reflects MAS’ focus on medium-term inflation risks rather than recent inflation outturns, with a stronger growth outlook keeping the output gap positive for longer and supporting a restrictive policy stance. This is despite an expected growth slowdown in the second half.

She added that a breakdown in the Middle East ceasefire has pushed up crude and refined fuel prices, raising imported inflation risks through higher fuel and freight costs.

Growth backdrop

Singapore’s economy grew 5.7 per cent year on year in the second quarter, according to the Ministry of Trade and Industry’s advance estimates.

On a quarter-on-quarter seasonally adjusted basis, gross domestic product rose 1.1 per cent, after an upwardly revised 1.3 per cent expansion in the first quarter.

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MAS said disruption to feedstock weighed on activity in a narrow segment of oil-related sectors, but this was more than offset by robust growth in technology-related segments, with most other major sectors growing in line with trend.

The central bank expects the economy to continue growing at a firm pace in the second half of the year, supported by global artificial intelligence-related capital expenditure, a strong pipeline of construction projects and steady expansion in the financial sector underpinned by strong credit growth.

The positive output gap is now forecast to widen slightly in 2026.

Yue agreed with this assessment, noting that a persistent output gap raises the need to contain medium-term inflation.

Inflation outlook

Core inflation came in at 1.5 per cent year on year in the second quarter, up from 1.2 per cent in January and February, before the outbreak of the Middle East conflict.

June inflation was relatively subdued, with headline at 1.9 per cent year on year and core at 1.6 per cent.

MAS kept its 2026 forecast range for both core and headline inflation unchanged at 1.5 to 2.5 per cent.

It expects core inflation to step up from July and remain elevated into early 2027, before easing more discernibly from around the middle of that year as global energy prices gradually moderate.

Yue, too, expects core inflation to step up from July and stay elevated into early 2027, matching MAS’ own projections.

MAS flagged that inflation could pick up more strongly than anticipated if energy prices spike anew, noting that fuel reserves have been drawn down significantly and renewed supply disruptions in the Middle East could trigger sharp oil price surges.

It added that robust investment growth could also generate greater demand spillovers, both abroad and domestically.

On the downside, an unexpected tightening in financial conditions or a pullback in AI-related investment could weigh on the sustainability of GDP growth and inflation.

The central bank added that it is “well-positioned to respond effectively to any risk to medium-term price stability” and will continue to monitor economic developments, while standing ready to curb excessive volatility in the S$NEER.