MAS taking further step to tighten monetary policy in off-cycle move to slow inflation

SINGAPORE: The Monetary Authority of Singapore (MAS) said on Thursday (Jul 14) that it is taking a "further calibrated step" to tighten monetary policy amid rising inflation.

It is the fourth time since October last year that MAS has tightened its monetary policy. The adjustment falls outside of MAS' normal cycle of twice-yearly monetary policy reviews, typically in April and October.

"Since October 2021, MAS has been on a path of gradual monetary policy tightening in view of the rise in underlying inflation and steady economic recovery," the authority said.

The central bank said it would be prudent to tighten monetary policy further "so as to lean against price pressures becoming more persistent".

MAS said it will re-centre the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band up to its prevailing level.

"There will be no change to the slope and width of the band. This policy move, building on previous tightening moves, should help slow the momentum of inflation and ensure medium-term price stability," added the authority.

Unlike most central banks that manage monetary policy through the interest rate, MAS uses the exchange rate as its main policy tool. It lets the exchange rate float within an unspecified policy band, and changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the Singapore dollar.

In October last year, MAS slightly increased the rate of appreciation of the S$NEER policy band as a pre-emptive move in light of the pick-up in inflation.

In January, MAS added slightly to the rate of appreciation of the band and in April 2022, it re-centred upwards the S$NEER policy band and further increased its rate of appreciation.

"This was in view of a fresh impulse to inflation arising from shocks to global commodity prices and supply chains in the wake of the Russia-Ukraine war," said MAS in its statement on Thursday.

INFLATION

MAS added that core inflation is expected to rise above 4 per cent in the near term. It is projected to be between 3 per cent and 4 per cent this year, up from the earlier forecast of 2.5 per cent to 3.5 per cent.

"Although it should ease in (the fourth quarter of) 2022, there is considerable uncertainty over the extent of the decline," it said.

"At the same time, the Singapore economy remains on track to expand at a creditable pace in 2022, though with slowing momentum."

Since the last monetary policy statement in April, both external and domestic factors have exerted further pressure on inflation, said MAS.

Core inflation rose to an average of 3.4 per cent year-on-year in April and May from 2.5 per cent in the first quarter of the year, reflecting stronger price increases in a broad range of goods and services.

Non-cooked food inflation picked up due in part to "sharply higher" poultry prices, while retail goods, food services and transport inflation accelerated amid higher costs and a rebound in demand following the lifting of most COVID-19 restrictions, added MAS.

Business cost pressures also continued to accumulate on the back of further increases in the prices of fuel and other imported inputs, as well as utilities and labour costs.

Overall inflationary pressures will remain elevated in the months ahead, said MAS.

"Although global supply chain frictions are easing, external inflationary impulses have become more broad-based, reflecting underlying constraints in global commodity and labour markets," the authority added.

"Domestically, resilient private consumption expenditure, underpinned by the tight labour market, will lead to greater passthrough of cost pressures."

It warned that there remained "upside risks" to inflation from fresh shocks to global commodity prices and domestic wage pressures.

GROWTH OUTLOOK

Global gross domestic product (GDP) growth is likely to have eased in the second quarter of this year, reflecting tighter financial conditions, persistently high inflation and geopolitical uncertainty. 

While a slowdown is expected in the advanced economies, private sector balance sheets and labour demand remain resilient.

MAS said that in the region, economies that are lifting mobility and travel restrictions will spur a short-term recovery in demand and the easing of supply chain frictions.

Singapore's economy grew 4.8 per cent year-on-year in the second quarter of this year, according to advance estimates from the Ministry of Trade and Industry (MTI) on Thursday.

On a quarter-on-quarter seasonally-adjusted basis, Singapore's gross domestic product (GDP) was unchanged in the second quarter, after posting an expansion of 0.9 per cent in the first quarter.

Growth in the second quarter was weighed down by external-facing sectors, such as wholesale trade and manufacturing. Sectors that bore the brunt of the pandemic generally benefited from the easing of COVID-19 restrictions.

"Slowing external growth momentum will weigh on Singapore’s trade-related sectors in the second half of the year," said MAS.

"The domestic-oriented and travel-related sectors are, however, expected to continue their recovery and support economic expansion."

Looking ahead to next year, there are risks of a "more significant slowdown" in Singapore's key trading partners as monetary policy tightening in response to elevated inflation dampens consumption and investment demand, the authority added.

Singapore's GDP growth is expected to moderate further next year, in tandem with a weaker global economic environment.