Singapore’s MAS Unexpectedly Tightens Amid Price Pressures

(Bloomberg) -- Singapore’s central bank unexpectedly tightened its monetary policy settings, strengthening the local dollar, as the city-state joins policymakers globally concerned about risks of persistent inflation. 

The Monetary Authority of Singapore, which manages the exchange rate as its main monetary tool, increased the slope of its currency band Thursday “slightly” from zero percent previously. That means it’s allowing the currency to appreciate against its peers in the months ahead to counter imported cost pressures.

The Singapore dollar rose as much as 0.3% after the announcement to its strongest against the U.S. dollar since Sept 23.

Monetary Authority of Singapore’s Past Policy Changes: Table

The policy move came as Singapore reported that gross domestic product in the third-quarter expanded 6.5%, in line with expectations. The central bank said in a statement that it sees growth “likely to remain above trend in the quarters ahead.”

Only one of 15 economists surveyed by Bloomberg expected a steepening of the MAS currency band. Tamara Henderson of Bloomberg Economics also correctly predicted the out-of-consensus move, having flagged a “robust outlook” and inflation risks.

Singapore’s twice-yearly monetary policy decisions provide a window on the global economy given the city-state’s high exposure to trade and supply-chain price pressures, which have risen in recent months. 

Central banks globally are becoming worried inflation will be more persistent than originally expected and are beginning to ease pandemic-era stimulus. The Federal Reserve is set to slow its asset-purchase program, while Singapore joins Norway, Brazil, Mexico, South Korea and New Zealand tightening policies.

Read more: Central Bankers Spooked by Signs Inflation Lingering for Longer 

“Looks like concerns about global supply chain constraints have helped to tilt the transitory rhetoric to expectations it will persist for some time,” said Selena Ling, head of treasury research and strategy at Oversea-Chinese Banking Corp. 

Details of the MAS price outlook Thursday include:

• Core inflation, which strips out costs of private transport and accommodation, in 2021 will come in at the upper end of its 0%-1% estimate, then average 1%-2% in 2022
• All-items inflation this year will be around 2%, compared with earlier expectations of 1%-2%, and average 1.5%-2.5% next year

Quickening inflation “in the quarters ahead” rests on imported cost pressures from a strengthening recovery in global demand, the MAS said, and supply constraints that have sent commodity prices soaring worldwide. 

Domestically, it sees wage growth firming as the job market improves, consumer prices rising alongside business costs amid re-openings and reinstatement of service fees that were delayed during the pandemic.

The MAS has a unique approach to monetary policy. Rather than using interest rates to maintain price stability, it guides the local dollar within a policy band against a trade-weighted basket of currencies. 

Policy is set by adjusting the slope, or pace of appreciation, as well as the width and center of the currency band. Since the outset of the pandemic last year it had set the slope at 0%. The MAS left the width and center of the band unchanged Thursday. 

With one of the highest Covid vaccination rates in the world, Singapore also is closely watched for its policy responses amid the pandemic recovery, including re-opening of travel and fiscal support that’s included about S$100 billion ($74 billion).

Economic Growth

MAS said the trade-reliant nation’s growth outlook is bolstered by a “resilient electronics cycle” and generally improving business activity. Domestic- and travel-focused sectors should also benefit as Singapore transitions toward living with Covid-19 as endemic.

“Barring the materialization of tail risks such as the emergence of a vaccine-resistant virus strain or severe global economic stresses, the Singapore economy should remain broadly on an expansion path,” the MAS said. “The slack in the labor market should continue to be absorbed and the negative output gap close in 2022.”

The Ministry of Trade and Industry’s third-quarter GDP data on Thursday also showed the economy expanded 0.8% quarter-on-quarter on a seasonally adjusted, non-annualized basis. The median estimate was for growth of 1.1%

The MAS said Thursday that it sees economic growth “slower but still-above trend” in 2022 after this year’s expected 6%-7%. The trade ministry is expected to release a 2022 outlook next month. 

More details from the third-quarter GDP report include:

• Manufacturing expanded 7.5% from the same period in 2020 after growing 18% in the previous three months
• Construction jumped 57.9% year-on-year, after a 117.5% surge in the second quarter
• Services industries grew 5.5% after expanding 10.8% year-on-year in the prior three-month period

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