Economists expect 'double tightening' of monetary policy after headline inflation surprises at 4% in Dec

Jan 24, 2022

MORE aggressive tightening of monetary policy could be in the cards in April, said private-sector economists, after Singapore's higher-than-expected headline inflation in December prompted the authorities to review their 2022 forecasts.

Headline inflation hit 4 per cent, exceeding economists' expectations of 3.7 per cent and beating November's previous high of 3.8 per cent, the latest consumer price index (CPI) figures from the Department of Statistics (Singstat) showed.

This is the fastest that headline inflation has risen since February 2013, when it was 4.9 per cent.

Core inflation, which excludes accommodation and private transport, edged up to 2.1 per cent, above the 1.6 per cent figure that was November's reading and exceeding economists' median estimate of 1.8 per cent.

Commenting on the latest figures, Selena Ling, OCBC's chief economist and head of treasury research and strategy, said the higher-than-expected CPI "may be more a question of whether it would heighten speculation of faster or more aggressive tightening at the upcoming April monetary policy statement".

"It is also likely that the language would sound more concerned about potential upside inflation risks going ahead since MAS (Monetary Authority of Singapore) and MTI (Ministry of Trade and Industry) are reviewing the current forecast range for both headline and core CPI for 2022," she added.

MAS and MTI said on Monday (Jan 24) they are reviewing their 2022 forecast ranges in light of the recent stronger-than-projected inflation outturns.

The surprise upside has led some economists to believe that there will be a "double tightening" of monetary policy during the April meeting.

Maybank Kim Eng economists Lee Ju Yue and Chua Hak Bin expect MAS to shift to a steeper appreciation slope, and recentre the Singapore dollar nominal effective exchange rate (S$NEER) band to the current prevailing rate.

"We also cannot rule out a pre-meeting tightening move before the scheduled April meeting, given the persistent and rising inflation pressures," they added.

Echoing Chua and Lee, Barclays regional economist Brian Tan expects MAS to further tighten monetary policy by recentring the S$NEER band upwards and raising its slope.

"If the MAS comes to believe the balance of risks has shifted more clearly towards inflation, as we expect, policymakers are likely to see little reason to delay reversing the downward recentring implemented in March 2020," he added.

UOB economist Barnabas Gan also expects to see MAS raise the policy slope come April, but unlike the Barclays and Maybank economists, he expects the width and centre of the band to remain unchanged.

Ling said monetary policy may even be tightened further in October, should MAS not take more aggressive action at the April meeting.

On their outlook for 2022, Chua and Lee maintained their forecasts for headline and core inflation at 2.6 per cent and 1.8 per cent respectively, which they noted are already at the upper end of MAS' current forecast range.

They expect to see core inflation exceed 2 per cent in the first quarter of the year, driven by travel-related costs due to border reopening, while the domestic demand recovery will increase retail and services costs.

Meanwhile, Barclay's Tan raised his 2022 estimates for headline and core inflation to 3.8 per cent and 2.8 per cent, up from 2.1 per cent and 3.2 per cent previously.