The Monetary Authority of Singapore (MAS) has tightened its monetary policy on 25 January in an unexpected inter-meeting move aimed at countering rising inflation.

The central bank, which typically holds its policy meetings in April and October, said it will “raise slightly” the rate of appreciation of the Sing dollar nominal effective exchange rate (S$NEER) policy band.

The width of the policy band and the level at which it is centred remained unchanged, it said, reported CNA.

The off-cycle tightening move came a day after official data showed Singapore’s core inflation – an important gauge for MAS – rose by the fastest pace in nearly eight years last month on the back of a steep increase in air fares.

Even then, most economists were not expecting MAS to shift its monetary policy stance before April.

The central bank said its latest move “builds on the pre-emptive shift to an appreciating stance” in October last year and is “appropriate for ensuring medium-term price stability”.

The last time MAS surprised markets with an off-cycle move was in January 2015, when it unexpectedly reduced the slope of the band. Then, a sharp drop in global oil prices had caused a significant shift in its inflation outlook.

How does MAS monetary policy work?

Unlike most central banks that manage monetary policy through the interest rate, MAS uses the exchange rate as its main policy tool because Singapore is an open economy that depends heavily on trade.

This refers to the S$NEER – the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies from Singapore’s major trading partners.

The S$NEER is allowed to float within an unspecified band. Should it go out of this band, the MAS steps in by buying or selling Singapore dollars.

The central bank also changes the slope, width and mid-point of this band when it wants to adjust the pace of appreciation or depreciation of the local currency based on assessed risks to Singapore’s growth and inflation.

By raising the slope of its policy band on Tuesday, the MAS is effectively allowing the Sing dollar to appreciate, making imports cheaper and exports more expensive.

Why now? 

In its policy statement, MAS said its inflation outlook has shifted higher since October amid “a confluence of recovering global demand and persistent supply-side frictions”.

“There remain upside risks to inflation arising from the impact of pandemic-related and geopolitical shocks on global supply chains,” it added.

Core inflation is hence expected to pick up in the near term and could reach 3 per cent by the middle of the year before moderating, said the central bank.

This is due to “rapidly accumulating” external and domestic cost pressures, such as supply disruptions pushing up imported food costs, higher energy prices and a tight labour market.

“While core inflation is expected to moderate in the second half of the year from elevated levels in the first half as supply constraints ease, the risks remain skewed to the upside,” it noted.

With that, MAS said it now expects core inflation, which strips out private transport and accommodation costs, to rise between 2 and 3 per cent this year. This is above the 1 to 2 per cent forecast it had in October.

The 2022 forecast for overall inflation has also been revised to between 2.5 and 3.5 per cent, higher than the previous forecast range of between 1.5 and 2.5 per cent.

Given how inflation is rising with no let-up in sight, CIMB Private Banking economist Song Seng Wun said the MAS likely decided that it would be better to take a pre-emptive move now than wait for its scheduled policy meeting in April.

“After the December inflation report surprised significantly on the upside, especially core inflation, they are probably asking: Do we wait until April to tighten or do we do it earlier because there could be more upside surprises from prices?

“So they chose to be pre-emptive, clearly seeing that prices are not going to come off anytime soon,” said Song, adding that first-quarter inflation numbers will likely “be even higher”.

Capital Economics’ emerging Asia economist Alex Holmes agreed, noting that the “MAS is obviously worried”.

“We think the biggest risk to core prices is from the domestic outbreak of Omicron,” he added. “While the Government’s lighter-touch approach to containing the virus should limit its impact on GDP (gross domestic product), one trade-off of permitting a higher number of infections is likely to be inflation.”

Holmes expects prices to “continue to rise quickly”, with core inflation set to go above 3 per cent by March and exceed the central bank’s latest forecast range by averaging at 3.1 per cent for this year.


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