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Singapore makes unexpected move to tighten monetary policy: Why and what could happen next?

Singapore makes unexpected move to tighten monetary policy: Why and what could happen next?

FILE PHOTO: People are reflected on a poster of 50 Singapore dollar bills as they cross the road near the central business district in Singapore April 14, 2015. REUTERS/Edgar Su

SINGAPORE: In what economists described as a “hawkish” surprise, the Monetary Authority of Singapore (MAS) unexpectedly tightened monetary policy at its half-yearly review on Thursday (Oct 14).

The move bucked market consensus. Most watchers had expected the central bank to only start policy normalisation in April next year, given global concerns about economic recovery amid the spread of the more contagious Delta variant.

It is the MAS' first policy tightening since 2018, putting an end to the zero-slope stance first adopted in March last year when the Singapore economy started feeling the effects of the COVID-19 pandemic.

In its policy statement, the central bank said the economy remains on track to grow between 6 and 7 per cent this year.

It also flagged the possibility of higher inflation amid “accumulating” external and domestic cost pressures.

The decision to tighten monetary policy will hence “ensure price stability over the medium term while recognising the risks to the economic recovery”, it added.


Unlike most central banks that manage monetary policy through the interest rate, the 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 Singdollar nominal effective exchange rate (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.

The decision taken by MAS on Thursday is to “raise slightly” the slope of the S$NEER policy band from zero per cent previously, while keeping the width of the band and the level at which it is centered unchanged.

Raising the slope of the policy band effectively allows the Sing dollar to appreciate, making imports cheaper and exports more expensive.

The Sing dollar gained some ground against the US dollar on the back of the monetary policy announcement and was last seen about 0.2 per cent higher at 1.3493 at 1.52pm.

The three policy levers of MAS

1. The slope

This is probably the most common tool used by the 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 last year, 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”.



Rising inflation is the primary reason for the central bank’s earlier-than-expected move, said economists.

MAS said Singapore’s core inflation – a key policy consideration for the central bank – is expected to rise to 1 to 2 per cent next year, and come close to 2 per cent in the medium run.

DBS senior forex strategist Philip Wee described the MAS’ policy shift as “a timely response” to pre-empt global inflationary pressures, which have been on the rise amid supply chain disruptions and surging energy prices.

Mizuho Bank’s head of economics and strategy Vishnu Varathan said: “The MAS anticipates concurrent build-up in inflationary pressures as demand recovery conspires with capacity (and) supply-chain kinks and higher cost-push.”

There is also the potential for “extensive pass-through of prominent energy inflation”, while a tightening job market condition is reviving wage pressures.

“Finally, and perhaps most importantly, the long (six-month) lag between (policy) meetings raises the cost of normalisation signalling forgone,” said Mr Varathan.

“So, whilst recovery thus far has fallen short of levels, a backdrop of growing inflation risks in quarters ahead, alongside adequate recovery, incentivises (a) pre-emptive normalisation," he added.

Calling the MAS “unexpectedly hawkish”, OCBC’s head of treasury research and strategy Selena Ling noted that apart from external factors, there were also “some policy-driven cost pressures” due to the recent expansion of the Progressive Wage Model to include more sectors and occupations.

“In addition, service fee hikes, including those in transport, education and healthcare, also are on the cards, but how much wage growth would also pick up in 2022 remains the crux for end-consumers which are likely to face higher prices for a large swathe of goods and services going ahead,” she said.

With Singapore being a small and open economy that is dependent on imports of goods and migrant workers, the “pass-through to end-consumers may be fairly immediate”.

As such, the steepening of the S$NEER slope “would help alleviate some of the broad US dollar strength and contain imported inflation for goods from regional economies", Ms Ling added.

Agreeing, HL Bank’s senior treasury strategist Jeff Ng, said: “When monetary policy is tightened, it helps to lower the prices of imports for local consumers, which will help to moderate inflation. If you don’t tighten, then you are running the risk of allowing inflation to increase further.”

Meanwhile, market watchers like DBS senior rates strategist Eugene Loew pointed out that the MAS’ shift mirrors that of other central banks across the world.

“As we transition away from the pandemic crisis and reopen travel, monetary policy should also normalise and with focus tilt towards managing inflation risks,” he said.

Still, the earlier-than-expected policy tightening came amid uncertainties about growth – a reason why some economists expected the central bank to keep monetary policy unchanged.

Preliminary data released separately on Thursday morning showed that Singapore’s economy grew by 6.5 per cent year-on-year in the third quarter, slowing from the 15.2 per cent growth in the previous quarter.

The economic recovery “still has some way to go”, said economist Alex Holmes from research firm Capital Economics.

COVID-19-related weakness remained evident in the third quarter, he said, pointing to the 1.3 per cent quarter-on-quarter contraction for the wholesale and retail trade, and transportation and storage sectors.

“Consumer spending will have been hit once more by restrictions that were brought in again in late September, despite the country’s world-leading vaccination rate,” Mr Holmes added.

“The bumpy experience of learning to live with the virus so far shows that it is unlikely that social distancing measures will be lifted quickly and that they could be tightened again in future.”

While the recent expansion of vaccinated travel lane arrangements to 11 countries will help, “travel is likely to be slow to resume”. “As such, parts of the service sector are still set to remain well below their pre-pandemic levels of output throughout next year,” the economist wrote in a note.


Economists are mixed as to whether the central bank will follow up with another policy tightening at its next policy review in April 2022.

Capital Economics said they “don’t see a reason for the MAS to tighten any further” with weak spots in the economy likely to remain a drag on underlying price pressures.

Transport price inflation is also set to fall back sharply in year-on-year terms, as a low base drops out. 

“Overall, the MAS measure of core inflation, which it aims to keep ‘just under 2 per cent’, is only likely to rise gradually over the coming months and quarters, from 1.1 per cent in August,” Mr Holmes said.

On the other hand, Mr Ng said the central bank’s decision on Thursday “opens the door for further tightening in 2022”.

“Barring any sort of major roadblocks like a resurgence in COVID-19 infections around the world or a new variant, I think we are on track to tighten even further”.

But before that, the Singapore dollar’s rise on the back of the latest announcement could be short-lived.

Mr Wee said the bank’s forecast remains for the US dollar to end the year higher at 1.37 against the Sing dollar, given that the greenback is set to strengthen globally with the US Federal Reserve poised to tighten monetary policy.

Source: CNA/sk(gs)


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