SINGAPORE – In the latest salvo in its fight against inflation, Singapore’s central bank tightened monetary policy on Friday (October 14), allowing the national dollar to appreciate to curb domestic cost pressures in a move likely to bolster the currency’s increasingly favored status as it demonstrates resilience against the fast-appreciating US dollar.
The Monetary Authority of Singapore (MAS) said in a statement that it would raise the mid-point of the Singapore dollar policy band “up to its prevailing level,” a less aggressive move than some observers expected. Specifically, MAS refrained from adjustments to the slope or width of the currency band, both closely watched policy tools it could have used.
The MAS uses exchange rates, managed against a trade-weighted undisclosed basket of currencies from Singapore’s major trading partners, as its primary monetary policy tool to ease import costs, the main contributor to inflation in a city-state that imports almost everything it consumes, leaving domestic interest rates to shadow those of the US Federal Reserve.
“By not changing the slope of the band, [the MAS] took the calibrated approach of not allowing the pace of currency appreciation to quicken further. This is especially given the fact that the Singapore dollar is already one of the strongest performing currencies against the US dollar so far this year,” said Cheryl Chan, senior vice president for capital markets at digital securities exchange ADDX.
While Singapore’s dollar has indeed weakened against the US dollar, depreciating around 5.7% against the greenback from the start of the year through October 13, it has outperformed regional peers whose currencies have dropped by double digits over the same period and is trading at record levels against major currencies like the Japanese yen, now at a 32-year low.
“The move today consolidates the Singapore dollar’s gains against a basket of international currencies and therefore enhances its status as a safe haven currency in the global capital markets. This will likely strengthen Singapore’s value proposition as an important global and Asian wealth management hub,” ADDX’s Chan told Asia Times.
The Singapore dollar strengthened as much as 0.7% to 1.4229 per US dollar after the MAS’ tightening. Among the reasons for the local currency’s resilience against a backdrop of high inflation and economic uncertainty, analysts say, are that Singapore enjoys a triple-A sovereign credit rating, a significant current account surplus and a rich store of foreign currency reserves.
Wall Street banks such as Citigroup Inc and Goldman Sachs Group are reportedly bullish on the currency, with the latter naming the Singapore dollar “our favored currency in non-Japan Asia” in September amid wagers that it would rally against the greenback should MAS tighten policy this month, as it has.
But a stronger Singapore dollar can also be a double-edged sword. An appreciating local currency has stoked concerns about the erosion of Singapore’s export competitiveness, particularly with weakening demand from China now exerting downward pressure on the city-state’s manufacturing performance and fears that other major trading partners such as the US are slowing or headed for recession as they bid to curb inflation with rate hikes.
“A Singapore dollar that is too strong could hurt exports and negatively impact economic growth at a time when the risk of a full-scale global recession cannot be written off,” Chan added. “This comes at a time when the global economy potentially faces a hard landing in light of factors such as the slowdown in China and central banks in the West raising interest rates aggressively.”
The MAS, in its half-yearly policy statement, said the global economy would face high inflation and lower growth in 2023, noting that Singapore’s economic growth will “come in below trend” next year, leading it to assess that, “on balance, a further tightening of monetary policy is needed to help ensure that price pressures are dampened over the next few quarters.”
Friday’s adjustment is the fifth time Singapore’s monetary policy has been adjusted in the past year and comes amid core consumer inflation in the city-state hitting a near 14-year high in August – rising 5.1% year-on-year, up from 4.8% in the previous month – led by sharp increases in the prices of services and food, which were up 3.8% and 6.1% respectively.
The MAS said that it expects core inflation to “stay around 5%” for the rest of the year, and into early 2023. August’s headline consumer price index (CPI), or overall inflation, came in at 7.5% year on year, surpassing the 7% in July. For the whole of 2022, the central bank expects core inflation to average around 4% while headline inflation is projected to be around 6%.
Singapore’s central bank projects that inflation will only “ease more discernibly in the latter half of 2023.” Its monetary policy decision was accompanied by advance estimates showing better-than-expected third-quarter growth with a 4.4% expansion year-on-year, or 1.5% growth on a quarter-on-quarter seasonally adjusted basis, up from a 0.2% contraction in the second quarter.
“Further easing of the Covid measures has been the fundamental reason behind the rebound. Tourist arrivals are now near pre-Covid levels. A strong pent-up demand domestically is further icing on the cake,” DBS Group Research senior economists Irvin Seah and Philip Wee said in a note, referring to pandemic-related restrictions that have been almost entirely relaxed since early April.
Manufacturing output contracted and financial services charted a weaker third quarter showing compared to the April-June period, reflecting moves by Singapore’s government to downgrade its 2022 gross domestic product (GDP) forecast in August to between 3-4% from 3-5%, citing a weaker external demand outlook and significant downside risks to the global economy.
DBS’ Seah and Wee said third-quarter growth momentum implied “a very modest upside risk” to their 3.5% full-year GDP growth estimate. “However, external headwinds are certainly picking up. Tighter monetary conditions, high inflation, and geopolitical tensions will exert even greater pressure on global economic growth momentum in the coming quarter,” they said.
The pair said the Singapore dollar rate is at “a sweet spot for market participants” but cautioned that “exchange rate appreciation alone cannot be the panacea.” To avert a “destabilizing wage-price spiral,” Seah and Wee said Singapore’s government would encourage employers and workers to “boost skills upgrading and to increase productivity to keep the country competitive.”
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