MAS tightens Singdollar policy ahead of expectations, as inflation climbs

MAS tightens Singdollar policy ahead of expectations, as inflation climbs

Oct 14, 2021

SINGAPORE'S central bank unexpectedly tightened its monetary policy settings at its half-yearly review on Thursday (Oct 14), citing "accumulating" external and domestic cost pressures.

Bucking the market consensus, the Monetary Authority of Singapore (MAS) moved to "raise slightly the slope" of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, up from a flat or "zero" slope before.

The width and mid-point of the band, in which the Singapore dollar is allowed to move, were kept unchanged.

"This appreciation path for the S$NEER policy band will ensure price stability over the medium term while recognising the risks to the economic recovery," the MAS said in its policy statement.

That's as MAS core inflation is expected to come in between 1 per cent and 2 per cent in 2022. Core inflation is expected to stay "close to 2 per cent in the medium term" and fall near the upper end of the zero to 1 per cent range in 2021.

"Growth in the Singapore economy is likely to remain above trend in the quarters ahead," said the MAS, which projected that economic output should close its negative gap and return to "around its potential" in 2022.

"At the same time, external and domestic cost pressures are accumulating, reflecting both normalising demand as well as tight supply conditions."

The MAS last changed its policy parameters in end-March 2020, unveiling an unprecedented "double easing" that both flattened the slope and lowered the mid-point of the band.

Vishnu Varathan, head of economics and strategy at Mizuho, argued that the economic recovery is still below the levels seen in earlier slope hikes. Still, he added that "a backdrop of growing inflation risks in quarters ahead, alongside adequate recovery" might have prompted "pre-emptive normalisation" ahead of the MAS's next review in April 2022.

Meanwhile, calling the central bank "very hawkish", HSBC senior Asia currency strategist Joey Chew said that the MAS "sounded confident about global and domestic growth remaining above trend next year" and suggested that the slope could have been raised to 1 per cent, compared with the estimated 0.5-point changes in previous rounds of tightening.

Most watchers had expected MAS policy normalisation to begin in April 2022, despite others warning that inflation pressures could push the central bank into an earlier tightening.

Oxford Economics analysts Priyanka Kishore and Jung Sung-Eun said in a note on Thursday morning: "We estimate that S$NEER is currently trailing well within the policy band at slightly above the centre of the slope. The sharp rise in prices since April this year likely pushed the central bank to tighten its policy. Recent price pressures have been felt across the board."

The MAS regulates the slope, width and mid-point of the S$NEER policy band to manage the strength of the Singdollar against foreign currencies and ensure medium-term price stability.

Separately, the Singapore economy grew by 6.5 per cent year on year in the third quarter, cooling from 15.2 per cent in the quarter before, according to flash estimates released on Thursday morning from the Ministry of Trade and Industry.