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MAS tightens monetary policy in surprise off-cycle move: Why and what it means for you and me

MAS tightens monetary policy in surprise off-cycle move: Why and what it means for you and me

People walk in the financial business district of Raffles Place in Singapore on Jan 11, 2021. (Photo: AFP/Roslan Rahman)

SINGAPORE: The Monetary Authority of Singapore (MAS) tightened its monetary policy on Tuesday (Jan 25) 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.

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.


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.

The three policy levers of MAS

1. The slope

This is probably the most common tool used by MAS to adjust the band.

Simply put, the slope determines the rate at which the Sing dollar appreciates. If the slope is reduced, this means the local currency will be allowed to strengthen at a slower pace. It strengthens at a faster pace when the slope is increased.

2. The mid-point

This is a tool generally reserved for “drastic” situations, such as recessions, when the outlook for growth and inflation sees an abrupt and rapid change.

Compared to tweaks in the slope, an adjustment in the mid-point either upwards or downwards is likely to yield a quicker and bigger impact on the currency, economists have said.

The last time the MAS lowered the band’s center was in March 2020, when it also flattened the slope in a two-in-one easing move as the economy reeled from the pandemic's impact.

It also did a downward adjustment in April 2009, as the 2008 global financial crisis sent Singapore’s economy into a recession and inflation fell sharply.

By doing so, the MAS was effectively doing the equivalent of a one-off currency devaluation to support the economy. A weaker Sing dollar generally tends to be good news for the country’s exporters as it makes them cheaper and more competitive.

3. The width

This controls how far the Sing dollar can fluctuate. This means the wider the band, the more volatile the currency can be.

It is typically reserved for periods of increased uncertainties or volatility.

For instance, the band was widened in October 2001 after the Sep 11 terrorist attacks in the United States led to extreme volatility in the financial markets.

More recently in October 2010, the width was also widened slightly “in view of the volatility across international financial markets”.



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 Mr 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.”

Mr Holmes said he 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.


Economists said the central bank’s move to allow for a stronger Sing dollar will go towards taming price increases for the man on the street, although the impact will not be immediate.

Noting how the prices for everyday items have risen and are likely to go up further amid persistent global supply chain snarls and the rally in commodity prices, Mr Song said: “From the MAS’ standpoint, it cannot make external prices go down but what it can do is to use the exchange rate to minimise higher import costs.

“It’s about trying to contain as much of the imported inflation as possible by helping the Sing dollar stay firm against our key trading countries. So that instead of a S$10 increase, (consumers get) a smaller price jump of S$9.”

That said, the effects of monetary policy tweaks will take time – from six to nine months moving forward – to materialise.

“This doesn’t mean that your grocery will immediately be 5 to 10 per cent cheaper because everything would have been done in deals or contracts settled months ago,” said Mr Song.

“It’s for the medium term that we hope to see prices stabilising or increasing at a slower rate.”

A stronger Sing dollar compared to the currencies of other countries may also suggest more favourable exchange rates for travellers heading overseas, the economist added.

“But it’s good and bad news. Those who get to travel may enjoy a stronger Sing dollar but the flip side is that from travel package, insurance to items you buy, has become more expensive given how inflation is moving up across the world. Everything costs more now,” said Mr Song.


Economists said further tightening moves by the MAS cannot be ruled out, with the central bank eyeing inflation trends and the economy’s first-quarter GDP performance.

“The MAS has clearly decided on the merits of moving early … However, this front-loaded action does not rule out further tightening at the April meeting,” said ING’s senior economist Nicholas Mapa.

“The MAS will be closely monitoring inflation trends in the coming months to gauge whether more
aggressive tightening will be warranted,” he added.

OCBC Bank’s head of treasury research and strategy Selena Ling also said that given how Tuesday’s move is only a “slight steepening” of the appreciation path of MAS policy band, another steepening of the slope in April is “the path of least resistance … if inflation remains broad-based and persistent”. 

“The key determinant would be whether core inflation peaks at the 3 per cent handle and stabilises, or if private consumption remains very buoyant to drive car and accommodation prices higher, and there are more domestic fee adjustments arise down the road, in addition to imported inflation,” added Ms Ling.

All eyes will also fall on what higher inflation will mean for the planned increase in Goods and Services Tax (GST).

Prime Minister Lee Hsien Loong has said that the Government will have to start moving on the planned GST increase in Budget 2022 given that the economy is emerging from the pandemic.

Economists from Moody’s Analytics said the latest inflation reading “throws a spanner” into these plans. 

“The GST is widely expected to be raised by 2023 at the latest in order for the Government to balance its budget sheet,” said Asia-Pacific economists Denise Cheok and Shahana Mukherjee in a report issued after MAS’ policy decision.

“With prices already rising at record speed, the timing of a GST hike will need to be carefully considered.”

Source: CNA/sk(zl)


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