MAS is not done tightening yet
Singapore’s central bank is not done yet, with economists predicting further tightening at its next scheduled meeting after a surprise move on Jan 25 to blunt rising inflation risks.
The Monetary Authority of Singapore (MAS), which uses foreign exchange as its tool to stabilise prices, will take further steps to let the local currency appreciate in its April policy announcement, according to 15 out of 16 economists in a survey and research notes compiled by Bloomberg.
The central bank’s first unscheduled adjustment in seven years, which pushed the Singapore dollar to a three-month high, puts it among global central banks seeking to tighten policy in the face of rising consumer prices. It also comes as the Federal Reserve (Fed) prepares to begin raising rates in March.
“We expect the MAS to tighten again,” Chua Hak Bin and Lee Ju Ye at Maybank Singapore write in a note dated Jan 25. Steps taken so far “may not be sufficient to reduce imported inflation,” as the Singapore dollar is already trading near the top of its policy currency band, they add.
Singapore’s surprise move, mixed with higher-than-expected inflation figures from Australia, fed into market skittishness ahead of the Fed’s meeting this week. Those jitters have contributed to a more than 7% drop in global equities in 2022.
Further moves expected in April put Singapore among the forefront of central banks beginning to rein in looser policies that helped economies weather the pandemic. As Covid-19’s threat to growth fades, the focus has shifted toward controlling inflation driven by supply-chain disruptions, higher commodities prices and fiscal stimulus.
Unlike most central banks, Singapore uses foreign exchange as its main policy tool, guiding the local dollar against a basket of trade-partner currencies. In its statement on Jan 25, MAS said recovering global demand and supply-side issues had pushed prices higher since its last meeting in October.
For its core inflation measure — which last month hit the highest level since July 2014 — MAS cited rising energy and elevated imported food prices, as well as rising airfare and wages growing above historical averages amid a tight domestic labour market.
Its last two actions — a scheduled announcement last October and the surprise adjustment on Jan 25 — called for its main policy band to “increase slightly,” while leaving the centre and width of the band unchanged. Going forward, economists are mixed on what steps the MAS may take, with some seeing further steepening and others saying the band will be re-centred higher.
Because the MAS does not release details of its policy settings, economists and trading desks create their own models for the currency basket and policy band. Barclays, for example, expects the band to be re-centred 150 to 200 basis points higher in April, followed by a 50 basis point slope increase in October.
“The MAS’s decision to tighten ‘inter-meeting’ indicates that policy makers are on high alert over inflation and thus likely to favour more, not less, FX (foreign exchange) policy tightening in the near term,” Barclays economists including Brian Tan write in a note. “We expect more signs of labour shortages to emerge, pushing the MAS’s assessment of the balance of risks further toward inflation.”
“Given building core inflation pressures alongside a still strong growth outlook, we continue to expect MAS to increase the slope” of the policy band to 2% per year, economists at Goldman Sachs note in a report.
While Goldman’s base case does not include re-centring of the band, “further upside surprises to core inflation in coming months would increase the probability of a one-off re-centring, while lowering somewhat the probability of a 100 basis point slope increase at the April meeting,” the firm’s economists add.