MAS goes for more aggressive Singdollar policy tightening as it raises inflation fore

[reporter2]

MAS takes more aggressive 'double-barrelled' move to tighten monetary policy, raises inflation forecast

Apr 14, 2022

SINGAPORE'S central bank is taking a more aggressive approach to further tighten its monetary policy settings in 2 ways, while also raising its inflation forecast, citing fresh shocks to global commodity prices and supply chains that are adding to domestic cost pressures.

The Monetary Authority of Singapore (MAS) said on Thursday (Apr 14) that it will "recentre the mid-point" of the Singapore dollar nominal effective exchange rate (S$NEER) policy band at the prevailing rate, as well as "slightly raise" the rate of appreciation of the policy band.

This is according to its latest monetary policy statement, which is typically published twice a year.

In the last 6 months, however, MAS moved to raise the slope of the band twice amid rising inflation, including an off-cycle move in January that surprised the market.

"The fresh shocks to global commodity prices and supply chains are adding to domestic cost pressures and will bring MAS core inflation to a significantly higher level than its historical average through 2022. Underlying inflationary pressures remain a risk over the medium term," MAS said.

Accordingly, the central bank raised its core inflation forecast to 2.5 to 3.5 per cent this year, from its January projection of 2 to 3 per cent.

It is also expecting headline inflation to reach 4.5 to 5.5 per cent, compared with the earlier range of 2.5 to 3.5 per cent.

"This tighter monetary policy stance, which builds on the policy moves in October 2021 and January 2022, will slow the inflation momentum and help ensure medium-term price stability," MAS added.

Still, MAS' latest move was not altogether outside of economists' expectations, several of whom had warned of a possible "double-barrelled move" amid rising inflation.

Inflation had in recent months hit near-decade high levels, with Russia's invasion of Ukraine worsening the energy crisis and already-tight supply chains.

Headline inflation for January and February rose to 4.2 per cent, up from 3.7 per cent in the fourth quarter last year; core inflation, which excludes accommodation and private transport, was 2.3 per cent for the same period, increasing from Q4's 1.7 per cent.

On Thursday, the central bank warned that inflation is likely to increase by "more than previously anticipated" in the quarters ahead, due to "sharply higher" global commodity prices since late February and renewed supply chain disruptions arising from the Ukraine war and the Covid-19 pandemic.

Strong pent-up demand for discretionary expenditure could also lead to greater pass-through of accumulating business costs, MAS said, noting that the resident unemployment rate has declined to its pre-crisis level and is expected to remain low.

"While incoming non-resident workers would alleviate manpower shortages, the overall labour market will remain tight and keep resident wages well supported. The resulting unit labour cost increases will be a key source of underlying inflation," said MAS.

Meanwhile, gross domestic product (GDP) rose 0.4 per cent on a quarter-on-quarter seasonally adjusted basis in Q1, slowing down from the 2.3 per cent expansion in Q4, according to advance estimates by the Ministry of Trade and Industry.

MAS said the slowdown was "largely anticipated" and driven by weaker activity in the manufacturing and modern services sectors, which had posted strong outturns in the previous quarter.

While global GDP growth was strong in early 2022, overall prospects for the global economy are "uncertain and hinge on the evolution of the conflict and regional pandemic situation", it said.

"Nevertheless, at this juncture, aggregate demand growth in Singapore’s major trading partners is expected to ease somewhat but not be derailed given the buffer provided by savings and wealth accumulated in recent years," said MAS.

Against this backdrop, Singapore's trade-related and modern services sector should expand more slowly this year compared to 2021, although the recovery in the domestic-oriented and travel-related sectors should "gather pace" with a relaxation of Covid-19 measures, it added.

https://www.businesstimes.com.sg/gov...onetary-policy

[reporter2]

MAS goes for more aggressive Singdollar policy tightening as it raises inflation forecasts

14 April, 2022

SINGAPORE - Singapore's central bank tightened its monetary policy on Thursday (April 14) for the third time since October in a double-barrelled move to combat inflation that is expected to heat up.

To allow the local dollar to strengthen against currencies of its trading partners, the Monetary Authority of Singapore (MAS) re-centred the midpoint of the exchange rate policy band at the prevailing level, and slightly increased the slope or rate of currency appreciation.

There was no change to the width of the policy band, a move the central bank usually takes when markets are volatile.

MAS’ dual moves are the first time since April 2010 that both tools were used at the same time to tighten policy. It comes after a tightening in October and a surprise off-cycle move in January.

This is “a more aggressive move” than in October and January, Ms Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, said in a Bloomberg Television interview after the announcement, while Ms Sophia Ng, a currency analyst at MUFG Bank, told Bloomberg that “this is the most hawkish move that the MAS could undertake”.

The Singapore dollar jumped about 0.5 per cent to 1.3555 per US dollar immediately after the MAS move. It was trading at 1.3541 at 10.06am, up 0.6 per cent from its Wednesday’s close.

MAS also raised its inflation forecasts, with core inflation now projected to come in at 2.5 per cent to 3.5 per cent this year, from the 2 per cent to 3 per cent expected in January. Meanwhile, overall inflation is forecast at 4.5 per cent to 5.5 per cent, from the earlier range of 2.5 per cent to 3.5 per cent.

MAS said inflation will increase by more than previously anticipated because of the sharp gains in global commodity prices since late February and renewed supply chain disruptions brought about by both the Ukraine war and the Covid-19 pandemic - the latter a reference to lockdowns in China.

“The latest surge in energy and agricultural commodity prices will raise domestic inflation for electricity and gas, fuel and non-cooked food over the year. In turn, these will feed into higher transportation and food services costs,” it noted.

However, MAS stressed that its aggressive policy stance will help.

“This tighter monetary policy stance, which builds on the policy moves in October 2021 and January 2022, will slow the inflation momentum and help ensure medium-term price stability.”

MAS said core inflation is likely to pick up sharply in the coming months, before moderating later this year, reflecting in part some stabilisation of commodity prices and possible easing of supply constraints.

A stronger currency helps absorb some of the inflation that seeps in with imported goods and raw materials. Imported inflation is the biggest source of price gains in Singapore, which virtually buys everything it consumes from overseas.

Hence MAS’ use of the Singapore dollar's exchange rate as a tool to achieve its mandate of medium-term price stability for sustained economic growth has been quite successful for decades.

Core inflation, which strips out accommodation and private transport costs, came in at 2.2 per cent year on year in February, shy of the 10-year high of 2.4 per cent a month earlier. Overall inflation increased to 4.3 per cent, up from 4 per cent in January.

Central banks around the world, led by the United States Federal Reserve, are raising interest rates to combat inflation supercharged more recently by surging energy and commodity prices after the Russian invasion of Ukraine, and the lockdowns in China in response to a Covid-19 resurgence.

The first-quarter 2022 economic growth came in at 3.4 per cent, with growth slowing slightly more than expected, according to data released by the Ministry of Trade and Industry (MTI) on Thursday morning. MTI’s 2022 gross domestic product (GDP) growth forecast stands at 3 per cent to 5 per cent.

MAS said the overall prospects for global economic growth are uncertain and hinge on the evolution of the Ukraine conflict and regional pandemic situation.

“Nevertheless, at this juncture, aggregate demand growth in Singapore’s major trading partners is expected to ease somewhat but not be derailed given the buffer provided by savings and wealth accumulated in recent years,” it added.

Singapore is primarily an export-driven economy, with the bulk of value-add economic growth coming from the manufacturing and shipment of electronic goods such as semiconductors and their components.

That dependence on exports makes global demand a key determinant of the pace of GDP growth here.

https://www.straitstimes.com/busines...sing-inflation