The Monetary Authority of Singapore (MAS) will be further tightening its monetary policy stance so as to “lean against price pressures becoming more persistent”.
The central bank will re-centre the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band up to its prevailing level. There will be no change to the slope and width of the band.
Over the last three months, the S$NEER has broadly appreciated within the upper half of the policy band. The three-month S$ Singapore Interbank Offered Rate (SIBOR) rose to 1.9% from 1.1% in April this year, while the three-month compounded Singapore Overnight Rate Average (SORA) increased to 1.0% from 0.3%.
“This policy move, building on previous tightening moves, should help slow the momentum of inflation and ensure medium-term price stability,” says MAS in its statement released on July 14.
Since the last monetary policy statement in April, both external and domestic factors have exerted further pressure on inflation, says the central bank.
It adds that it sees overall inflationary pressures remaining elevated in the months ahead.
“Although global supply chain frictions are easing, external inflationary impulses have become more broad-based, reflecting underlying constraints in global commodity and labour markets. Domestically, resilient private consumption expenditure, underpinned by the tight labour market, will lead to greater pass-through of cost pressures,” says MAS.
While MAS Core Inflation is estimated to rise slightly above 4% in the near term before easing in the 4Q2022, MAS sees “considerable uncertainty over the extent of the decline”.
It adds that there are still upside risks to inflation from fresh shocks to global commodity prices and domestic wage pressures.
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To this end, MAS Core Inflation is now projected to be between 3.0% to 4.0% in 2022, up from the earlier forecast of 2.5% to 3.5%.
CPI-All Items inflation is also expected to increase, with a projected range of 5.0% to 6.0%, up from the previous forecast range of 4.5% to 5.5%. The higher estimate for CPI-All Items inflation comes as car and accommodation cost increases are likely to remain firm.
In addition, the tightening of the monetary policy comes as global gross domestic product (GDP) growth is likely to have eased in the 2Q2022 “reflecting tighter financial conditions, persistently high inflation and geopolitical uncertainty”, says MAS.
The central bank has been progressively tightening its monetary policy since October 2021 amid the economic recovery and as inflationary pressures picked up.
“The measures in some regional countries to contain the spread of Covid-19 also weighed on international production and trade”, reads the statement released by MAS.
That said, MAS believes the global economic expansion will remain “broadly intact” for the year.
“While a slowdown is expected in the advanced economies, private sector balance sheets and labour demand remain resilient. In the region, economies that are lifting mobility and travel restrictions will spur a short-term recovery in demand and easing of supply chain frictions,” says MAS in its statement.
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According to flash estimates released by the Ministry of Trade and Industry (MTI), Singapore’s GDP for the 2Q2022 was unchanged on a q-o-q seasonally-adjusted basis.
Growth in 2Q2022 was weighed down by the external-facing sectors such as wholesale trade and manufacturing, while the sectors that bore the brunt of the pandemic generally benefited from the substantial easing of border and domestic mobility restrictions.
To this end, MAS has estimated that Singapore’s GDP for the 2022 may come in at the lower half of its forecast range of 3% to 5%.
Looking ahead to 2023, the central bank warns that there may be 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.
“In tandem with a weaker global economic environment, Singapore’s GDP growth is expected to moderate further in 2023,” says MAS.
