MAS keeps currency policy unchanged to fight elevated inflation

SINGAPORE: Singapore’s central bank has kept unchanged its monetary policy stance aimed at strengthening the trade-weighted Singapore dollar to fight still-elevated inflation.

The Monetary Authority of Singapore (MAS) said yesterday that it would maintain the prevailing rate of appreciation of the Singapore dollar nominal effective exchange rate policy band, with no change to the width of the band or the level at which it is centred – parameters that indicate how high and how fast the central bank wants the currency to appreciate.

The Singapore dollar ticked up soon after the MAS statement, rising to 1.3530 to the US dollar from its close of 1.3540 on April 11.

The central bank kept its projection for both all-items inflation and core inflation – which excludes private accommodation and transport costs and better represents the expenses of Singapore households – unchanged at an average of 2.5% to 3.5% for 2024.

Its latest decision to again stand pat was widely expected after core inflation in February shot up more than expected on the back of higher services and food inflation partly linked to Chinese New Year spending.

It rose to 3.6% year-on-year (y-o-y) in February, up from January’s 3.1%. This was also the highest reading for core inflation since July 2023.

With core inflation stubbornly above the widely perceived MAS target of 2%, all 20 economists surveyed by Bloomberg News had expected the central bank to maintain its overall policy settings.

“MAS core inflation is likely to remain elevated in the earlier part of the year but should decline gradually and step down by the fourth quarter, before falling further next year,” the central bank said in its monetary policy statement yesterday.

“Accordingly, current monetary policy settings remain appropriate. The prevailing rate of appreciation of the policy band is needed to keep a restraining effect on imported inflation as well as domestic cost pressures and is sufficient to ensure medium-term price stability,” it noted.

MAS has tightened its policy five times between October 2021 and October 2022 before pausing.

The MAS decision also comes on the heels of hotter-than-expected inflation in the United States, pushing back expectations for an interest rate cut by the US Federal Reserve from June to much later in the year.

This would make it more difficult for other countries to embark on an easing cycle, as it would put more pressure on their currencies and possibly spur costpush inflation through imports.

The European Central Bank (ECB) on April 11 also held its policy stance unchanged. But ECB president Christine Lagarde in her comments to the press kept alive hopes of a possible rate cut in June.

Explaining the persistence of inflation in Singapore, MAS said core inflation in the near term would be supported by the recent hike in water tariffs.

Also, prices of certain services, such as education and healthcare, will continue to rise after staying muted in the past few quarters.

“Nevertheless, as imported and domestic cost pressures continue to abate, underlying inflation should moderate further,” MAS added.

The central bank warned that both upside and downside risks to the inflation outlook will remain.

“Shocks to global food and energy prices or stronger-than-expected demand for labour in the domestic economy could bring about additional inflationary pressures. However, an unexpected weakening in the global economy could induce a faster easing of cost and price pressures.” —