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Economists raise inflation forecasts, expect MAS to further tighten monetary policy in 2022

SINGAPORE — Economists are raising their own inflation forecasts and expecting the Monetary Authority of Singapore to further tighten monetary policy this year, even after the central bank surprised markets on Tuesday (Jan 25) with an off-cycle move to strengthen the Singapore dollar. 

The Monetary Authority of Singapore, which manages monetary policy through exchange rate settings, said that it would slightly raise the rate of appreciation of its policy band.
The Monetary Authority of Singapore, which manages monetary policy through exchange rate settings, said that it would slightly raise the rate of appreciation of its policy band.
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  • Economists are raising their own inflation forecasts by about 1 percentage point in line with revisions made Singapore’s central bank
  • They also expect the monetary policy to be tightened again in 2022
  • The GST hike, when it happens, will bring about another spike in inflation

SINGAPORE — Economists are raising their own inflation forecasts and expecting the Monetary Authority of Singapore to further tighten its monetary policy this year, even after the central bank surprised markets on Tuesday (Jan 25) with an off-cycle move to strengthen the Singapore dollar. 

Most revisions went up by about 1 percentage point for both headline and core inflation. 

The economists’ projections are in line with MAS revising its own forecast on Tuesday, with overall inflation expected to come in at between 2.5 and 3.5 per cent in 2022, higher than the earlier forecast range of between 1.5 and 2.5 per cent. 

Core inflation is projected to rise between 2 and 3 per cent this year — higher than the 1 to 2 per cent forecast expected in October last year. 

Analysts from DBS bank expect overall inflation to come in at 3.8 per cent for this year, compared with its earlier projection of 2.8 per cent.

Core inflation, which strips out private transport and accommodation costs, is expected to leap to 3 per cent compared with just 0.9 per cent previously.

Ms Selena Ling, head of treasury research and strategy at OCBC bank, raised her headline inflation to 3.5 per cent from 2.5 per cent, and projected core inflation to come in at 2.5 per cent instead of 2 per cent. 

Dr Chua Hak Bin and Ms Lee Ju Ye, economists from Maybank, also raised their full-year inflation forecasts for 2022. 

They projected that headline inflation may come in at 3.6 per cent, up from 2.6 per cent at the last forecast. Core inflation is revised upwards to 2.7 per cent from 1.8 per cent. 

The central bank, which typically makes its monetary policy decision only twice a year in April and October, said early on Tuesday that it will "slightly" raise the rate of appreciation of its monetary policy band. The midpoint of the policy band and its width will also remain unchanged. 

MAS manages monetary policy by adjusting its exchange rate settings, rather than through interest rates as most other central banks do.

By adjusting the slope of the policy band, its midpoint and width, the Singapore dollar is allowed to rise or fall against the currencies of its main trading partners within an undisclosed policy band, known as the Singapore dollar nominal effective exchange rate or S$NEER.

MAS said that this off-cycle move to tighten "builds on the pre-emptive shift" since October last year, when the central bank surprised markets by starting to tighten its monetary policy then. 

MORE TIGHTENING

Economists have cautioned in the fourth quarter of last year that inflationary pressures on several fronts — many of which were a result of measures to curb the spread of the Covid-19 pandemic — could continue and send consumer prices spiralling in 2022.  

Ms Ling of OCBC noted that although growth prospects remain intact and that the official forecast for Singapore’s economic growth remains at between 3 and 5 per cent for 2022, the inflation outlook was likely "the game changer... due to the near-perfect inflation storm arising from stronger demand and persistent supply chain bottlenecks". 

That is why the economists who spoke to TODAY are also not ruling out further rounds of tightening in 2022, despite this off-cycle move by MAS. 

Ms Ling said that steepening the slope of the policy band in April would be "the path of least resistance". 

Analysts from DBS, as well as Dr Chua and Ms Lee from Maybank, agreed that moving the midpoint of the policy band upwards is also another possibility. 

In March 2020, MAS lowered the midpoint of the policy band as it eased monetary policy to counter the economic fallout caused by the Covid-19 pandemic then. Before that, the last time it did so was during the 2009 global financial crisis.

Dr Chua and Ms Lee said: "The current pre-emptive move via the slope adjustment may not be sufficient to reduce imported inflation, as the S$NEER is already trading near the top side of the band."

Another issue complicating matters is the impending rise in Goods and Services Tax (GST).

Prime Minister Lee Hsien Loong said in his New Year message that the Government has to "start moving" on its planned increase from 7 per cent to 9 per cent. 

Some economists earlier said that this hike could take place as early as July this year. 

Analysts from DBS said in a research note on Tuesday: "Expect another spike in inflation should the (higher) GST be introduced. Considering the above, there is urgency for policymakers to anchor inflation expectation and to buffer imported inflation."

Related topics

inflation MAS Monetary Authority of Singapore economy GST consumer

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