SINGAPORE – A day after Singapore’s government released inflation data that surged past expectations with consumer price growth at a nearly eight-year high in December, its central bank announced on January 25 its second monetary tightening in three months in a surprise off-cycle move.
The unscheduled adjustment by the Monetary Authority of Singapore (MAS), which manages monetary policy through exchange rate settings, puts the city-state on the vanguard of central banks beginning to rein in loose monetary policies that helped stimulate growth amid the pandemic, with the focus now shifting to containing spiraling inflation.
Analysts have described the policy tightening, which slightly raises the “slope” or rate of appreciation of the Singapore dollar policy band to mitigate inflation by allowing the local currency to strengthen against peers, as a pre-emptive move ahead of anticipated interest rate hikes by the US Federal Reserve widely forecasted to begin in March.
“Inflation has been climbing in the US and other parts of the world. By announcing the policy change sooner rather than later, MAS is sending a clear signal to the market that it stands ready to act to bring prices under control,” said Cheryl Chan, senior vice-president for capital markets at digital securities exchange ADDX.
The possibility of a more aggressive-than-usual cycle of interest rate hikes from the world’s top central bank to dampen inflation from current multi-decade highs will pressure Asia-Pacific central banks to accelerate their own policy tightening, say economists, despite price pressures in the region that still comparably moderate to those in the US.
With at least seven central banks in the Asia-Pacific including those of Australia, India, Indonesia and South Korea set to announce monetary policy decisions in February, Singapore’s policy tightening is seen as a harbinger as regional economies prepare to insulate from the effects of rising dollar funding costs that could weigh on economic growth, hit stock markets and put pressure on bank lending portfolios.
As a city-state that imports almost everything it consumes, Singapore’s domestic economy is highly exposed to price hikes from overseas. Supply-chain disruptions, higher commodity prices and fiscal pump-priming have all driven costs upward on a wide range of goods from crude oil to food, while household power bills have spiked in recent months.
Consumer prices as measured by core inflation, which excludes accommodation and private road transport costs, jumped to 2.1% in December on a year-on-year basis, the highest since July 2014 and slightly above the MAS’ forecast. Headline inflation rose to 4% in December, the highest level since February 2013, well above the central bank’s forecast of 2.5%
Singapore had already started to tighten in October, when it shifted to a gradual appreciation path for the Singapore dollar in the face of higher inflation, up from a zero percent stance adopted in March 2020 to offset the economic fallout of the Covid-19 pandemic. But few had anticipated an out-of-cycle tightening from left field.
The MAS holds scheduled policy reviews twice a year, typically in April and October. It last surprised with an unscheduled adjustment in January 2015 when it eased policy after a collapse in global oil prices. The latest move is only the second time the central bank has acted outside of its biannual monetary policy statements since 2003.
In a statement announcing the policy adjustment, MAS said the outlook for Singapore’s inflation had shifted faster than expected amid “the confluence of recovering global demand and persistent supply-side frictions,” and cited continual upside risks to inflation “arising from the impact of pandemic-related and geopolitical shocks on global supply chains.”
Given these signs and trends, economists say it was appropriate for the MAS to have acted immediately instead of waiting until its scheduled policy review in April, when inflationary expectations could have set in more firmly, inducing consumers to bring forward their purchases for fear of higher prices and thereby fueling further price increases.
“Controlling inflation is an important priority for MAS, as inflation can lead to anxiety throughout the economy. It can also beget further inflation, if consumers bring forward their purchases due to concerns that prices are likely to go up in the near- to medium-term future,” said ADDX’s Chan.
The MAS has sharply revised inflation forecasts for the year, projecting headline or all-items inflation to hit 2.5% to 3.5% from the earlier range of 1.5% to 2.5%. Core inflation, which reflects persistent and generalized price changes rather than one-off price movements, is now projected to be 2% to 3%, up from October’s forecast of 1% to 2%.
The central bank said it expects core inflation to reach 3% by the middle of the year before moderating as supply constraints ease, though it does not rule out further supply shocks. Economists believe the MAS will almost certainly tighten policy again in April if core inflationary pressures show no sign of easing or exceed the 3% forecast range.
“We expect the MAS to tighten again,” Chua Hak Bin and Lee Ju Ye at Maybank Kim Eng Research said in a note provided to Asia Times, adding that the central bank’s preemptive move “may not be sufficient to reduce imported inflation” given that the Singapore dollar is already trading near the top of its currency policy band.
Unlike most central banks, Singapore manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed band. The width of the band, known as the Nominal Effective Exchange Rate, or S$NEER, and the level at which it is centered, was unchanged by the recent policy move.
The off-cycle adjustment has pushed the Singapore dollar to a three-month high, gains which could rise further if the MAS tightens policy again “via a re-centering of the S$NEER band at the April meeting [while] possibly [steepening] the slope again for a third time,” said Maybank Kim Eng Research’s economists.
Analysts do not foresee runaway double-digit inflation hitting Singapore or other regional countries, nor has the magnitude of price increases shaken recovery prospects for the city-state. The MAS has retained its economic growth forecast at 3% to 5% “barring fresh disruptions” in 2022, which is higher than the five-year pre-pandemic average.
Singapore’s economy grew 7.2% in 2021, the fastest expansion in over a decade, as it rebounded from a record 5.4% contraction in 2020 amid a two-month Covid-19 lockdown. Authorities have spent more than S$100 billion (US$73.8 billion) over the last two years to cushion the city-state’s trade-reliant economy from the impacts of the pandemic.
Often seen as a bellwether of global growth, Singapore’s recovery has been linked to buoyant export demand and a systematic early rollout of Covid-19 vaccines. Now, as global concerns begin to shift from weathering the pandemic to combating inflation, MAS’ policy moves are an early indicator that other regional central banks are likely to follow suit.
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