Singapore tightens policy 2nd time, inflation seen higher

January 26, 2022

Singapore’s central bank tightened its monetary policy stance for the second time in four months in an unscheduled decision, saying it considered it “appropriate to make another pre-emptive adjustment” at this juncture as the inflation outlook had shifted further upward amid the confluence of recovering global demand and persistent supply-side frictions.
The Monetary Authority of Singapore (MAS), which targets the value of the Singapore dollar against a basket of currencies to control inflation, said it would “therefore raise slightly the rate of appreciation of the S$NEER policy band,” while leaving the width of the band and level at which it is centered unchanged.
“This move builds on the pre-emotive shift to an appreciating stance in October 2021 and is appropriate for ensuring medium-term price stability,” said MAS, adding SN$NEER (the Nominal Effect Exchange Rate) had broadly appreciated within the upper half of the policy band in the last three months.

MAS normally decides monetary policy twice a year, in April and October, but on occasions it will take an off-cycle decision.

The tightening in October also took most analysts by surprise but since then inflation has continued to accelerate and an expected increase in Goods and Services Taxes (GST) this year, which would pass-through to core inflation, raised expectations MAS would tighten policy in April.

Singapore’s all-items inflation rate rose to a 2021-high of 4.0 percent in December from 0.2 percent in January while MAS core inflation rose to 2.1 percent from 1.6 percent, driven by an increase in services inflation from higher airfares.

For the full year, headline inflation rose to 2.3 percent from minus 0.2 percent while core inflation rose to 0.9 percent from minus 0.2 percent in 2020, MAS and the Ministry of Trade and Industry said Jan. 24.

“There remain upside risks to inflation arising from the impact of pandemic-related and geopolitical shocks on global supply chains,” said MAS, adding the domestic labour market has tightened and wage growth is above its historical average, which has boosted prices more than forecast.

MAS said it expects core inflation to pick up further in the near term and could reach 3 percent by the middle of this year and raised its forecast for this year to 2.0-3.0 percent from 1.0-2.0 percent expected in October last year.

It also raised the forecast for all-time inflation, or headline inflation, to 2.5-3.5 percent from an earlier forecast of 1.5-2.5 percent.

In 2021 the economy of the city-state expanded at its fastest pace since 2010 as gross domestic product grew 7.2 percent after contracting 5.4 percent in 2020.

For this year MAS said Singapore’s economy remains on track to grow 3.0-5.0 percent, with the output gap turning slightly positive.

“Global economic prospects remain largely intact,” MAS said, adding the Omicron variant may temporarily dampen some clusters of activity but was unlikely to derail the broader economic recovery.

The Monetary Authority of Singapore issued the following statement:

1. Since the last Monetary Policy Statement in October 2021, there has been a further upward shift in Singapore’s inflation outlook, reflecting both global and domestic factors. MAS has therefore assessed that it is appropriate to make another pre-emptive adjustment in its monetary policy stance at this juncture.

2. In its October 2021 Monetary Policy Statement, MAS shifted to a gradual appreciation path for the S$NEER policy band, from zero percent previously. There was no change to the width of the policy band or the level at which it was centred. While monetary policy settings globally remained highly accommodative, MAS had assessed that a shift in its policy stance was necessary to ensure price stability in light of accumulating external and domestic cost pressures, even as the strength of the economic recovery remained uncertain.

Chart 1
S$ Nominal Effective Exchange Rate (S$NEER)

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3. 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) was unchanged at 0.4%, while the three-month compounded Singapore Overnight Rate Average (SORA) edged up slightly to 0.2% in January this year.

OUTLOOK

Growth Backdrop and Outlook

4. Global economic prospects remain largely intact. The Omicron variant that emerged in late 2021 may temporarily dampen specific clusters of activity, but is unlikely to derail the broader ongoing economic recovery. Accordingly, global GDP is still forecast to expand at an above-trend pace for a second consecutive year in 2022, even as uncertainties remain.

5. Based on the Advance Estimates released by the Ministry of Trade and Industry on 3 January 2022, the Singapore economy grew by 2.6% on a quarter-on-quarter, seasonally-adjusted basis in Q4 2021, stronger than the 1.2% expansion in Q3. The economic recovery, which has thus far been led by the trade-related and modern services sectors, should extend to the domestic-oriented and travel-related sectors over the course of this year as domestic safe management measures and border restrictions are progressively eased. Barring fresh disruptions, the 2022 GDP growth forecast remains unchanged at 3–5%.

Inflation Trends and Outlook

6. The outlook for Singapore’s inflation has shifted higher since the last Monetary Policy Statement in October 2021, amid the confluence of recovering global demand and persistent supply-side frictions. There remain upside risks to inflation arising from the impact of pandemic-related and geopolitical shocks on global supply chains.

7. MAS Core Inflation stepped up over October to December last year. Energy prices have risen further while imported food inflation remains elevated due to regional supply disruptions. The CPI for airfares has also increased sharply, mostly reflecting the cost of COVID-19 testing requirements for international travel. The domestic labour market has tightened, with the resident unemployment rate now close to its pre-pandemic level and wage growth above its historical average. Against this backdrop, price increases across a broad range of goods and services have been stronger than forecast.

8. The factors that drove global and regional inflation higher in late 2021 are likely to remain in play for a period. Domestic inflation will be exposed to these external pressures as well as the tight labour market.

9. MAS Core Inflation is hence forecast to pick up further in the near term, and could reach 3% by the middle of the year before moderating. The ongoing external supply constraints should ease in the second half of 2022, leading to some moderation in imported inflation, although there is risk of further supply shocks. The domestic labour market should continue to tighten and lead to strengthened wage pressures. Cost increases are likely to filter through to higher services prices in the face of a pickup in private consumption. Car and accommodation cost increases are also likely to remain firm in the near term and drive an increase in CPI-All Items inflation.

10. Taking these developments into account, MAS is revising its inflation forecasts for 2022. MAS Core Inflation is now projected to be 2.0–3.0% this year, from the 1.0–2.0% expected in October. Meanwhile, CPI-All Items inflation is expected to be 2.5–3.5%, from the earlier forecast range of 1.5–2.5%.

MONETARY POLICY

11. The Singapore economy remains on track to grow at a creditable pace of 3–5% this year. The output gap is expected to turn slightly positive.

12. MAS Core Inflation is forecast to be higher in the near term in view of rapidly accumulating external and domestic cost pressures. While core inflation is expected to moderate in the second half of the year from the elevated levels in the first half as supply constraints ease, the risks remain skewed to the upside.

13. MAS will therefore raise slightly the rate of appreciation of the S$NEER policy band. The width of the policy band and the level at which it is centred will be unchanged. This move builds on the pre-emptive shift to an appreciating stance in October 2021 and is appropriate for ensuring medium-term price stability.”

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