Economists say MAS' rare 2-pronged monetary move will likely slow pace of price rises, not reduce inflation

SINGAPORE — The latest move by the Monetary Authority of Singapore (MAS) to tighten monetary policy is not likely to reduce the rate of inflation here but rather slow the pace of price increases, economists said on Thursday (April 14).

For the person in the street, that means prices of goods and services will tend to keep going up in the months ahead, but not as much as if the central bank didn't act.

The economists note that central banks all over the world are scrambling to douse fast-rising prices of consumer goods and services. In the United States, for example, inflation just hit 8.5 per cent, the highest level since 1981.

As well as moving to strengthen the Singapore dollar on Thursday, MAS in its half-year monetary statement also revised its forecast for full-year core inflation, which strips out road transport and accommodation prices.

MAS now expects core inflation to come in between 2.5 per cent and 3.5 per cent, up from its previous forecast of 2 per cent to 3 per cent, made in January.

The MAS' tightening of monetary policy is its third such move since October last year, and involves two technical changes to the way the central bank manages the Singdollar in relation to the currencies of the country's main trading partners.

Unlike many central banks, MAS does not set interest rates as a way to implement monetary policy, but rather manages the value of the Singdollar by buying and selling both the local and foreign currencies.

MAS said on Thursday it would tighten monetary policy in two ways, which sound very technical but are essentially designed to strengthen the Singdollar:

First, it will re-centre the mid-point of its exchange rate policy band “at the prevailing level” of the Singdollar nominal effective exchange rate (S$NEER).

Second, it will “increase slightly” the rate of appreciation of the band to “exert a continuing dampening effect on inflation”. This is the third steepening of the slope since October last year.

MAS said it was revising its inflation forecast in the light of fresh shocks to global commodity prices and supply chains are adding to domestic cost pressures, and will significantly increase Singapore's core inflation.

Should the core inflation forecast of 2.5 to 3.5 per cent this year prove accurate, it would be the highest core inflation in almost a decade. In June 2012, the figure was at 2.7 per cent, while it was at 3.5 per cent in January that year. 

Over the last five years, the highest figure for core inflation stood at 1.9 per cent for several months between July 2018 and January 2019. 

TODAY spoke to economists to find out what these moves by MAS mean, and how will they help dampen the increase in the cost of living facing households.

WHAT THE MOVES MEAN 

DBS senior economist Irvin Seah said MAS' move to re-centre the mid-point of the exchange rate policy band is a one-off appreciation of the Singapore dollar compared to a basket of currencies of Singapore's major trading partners and competitors.

This means that relative to other currencies, the Singapore dollar will be stronger. 

The MAS website says the Singdollar's exchange rate is allowed to fluctuate within a policy band, providing "a mechanism to accommodate short-term fluctuations in the foreign exchange markets and flexibility in managing the exchange rate". 

The second move, to increase the rate of appreciation of the band, means that the rate at which this policy band which the exchange rate can fluctuate within will be increased at a quicker rate. 

"Going forward, the Singapore dollar will be appreciating against the basket of (foreign) currencies at a faster pace," said Mr Seah. 

It is the first time since April 2010 that MAS used both tools at the same time to tighten monetary policy.

Mr Seah said that this did not come as a surprise, as MAS had in March 2020 eased monetary policy by reducing the slope of the Singdollar policy band to a zero rate of appreciation in an effort to stimulate the economy.

This action had been taken because the economy had then been battered by the Covid-19 pandemic. Inflation had also been negative for much of 2020. 

Times have since changed, with high inflation, rather than a recession, now the key concern, said Mr Seah. 

"The MAS had made a similar move during the pandemic but in the opposite direction, so now it is essentially reverting the earlier easing move," he said. 

HOW WILL IT AFFECT HOUSEHOLDS 

Economists said that the decision to strengthen the Singapore dollar means that imports will become cheaper than they otherwise would have been.

"As Singapore imports most of our food and products, having a stronger currency will help to mitigate against the imported inflationary pressure," Mr Seah said. 

"For example, for a particular product, if global prices went up by 20 per cent, if the Singapore dollar were to appreciate by 10 per cent, it helps to offset part of the price increase." 

However, Ms Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, expects elevated inflation despite MAS' move. 

"The dual tightening move today will help to mitigate some of the imported inflation," she said.

"But it will not address global supply chain bottlenecks or alleviate domestic wage pressures due to the tightening labour market conditions." 

She added that while households may enjoy relatively cheaper imported goods, they will still face "generally rising prices for energy, food, and other services". 

Agreeing, CIMB economist Song Seng Wun said that the several factors, such as the economic recovery from the pandemic driving up demand and geopolitical uncertainties in Ukraine and Shanghai disrupting supply chains, have already increased prices. 

"The people on the street are already paying more. The strengthening of the Singapore dollar just dampens the impact (of price increases), but it does not mean that they will be paying less (than they are currently)," he said. 

REPERCUSSIONS ON THE EXPORT MARKET? 

While the import market may benefit from this move, economists said that the export market may become less competitive due to the currency appreciation. 

"Having a stronger Singapore dollar will imply a weaker export performance ahead," said Mr Seah. "With a weaker export performance, growth will definitely slow down." 

But a slowdown in growth may not be a bad news, as it could help ease inflationary pressure. 

"When growth starts to slow down, wage growth will start to soften, then domestic demand starts to cool," said Mr Seah. "When domestic demand starts to cool, prices will not rise at so fast a pace... you will see inflationary pressures start to cool off." 

Ms Ling added that the impact on exports may not be severe, as other economies may also be tightening their respective monetary policies. 

"Many central banks are also very hawkish and tightening monetary policy, so it’s all relative."