MAS tightens monetary policy for fifth time in 12 months to dampen 'persistent' inflation

SINGAPORE — The Monetary Authority of Singapore (MAS) has tightened monetary policy for the fifth time since October last year to dampen persistent price pressures, which are expected to last until the first half of next year.

The central bank said on Friday (Oct 14) that it will re-centre the midpoint of its Singapore dollar nominal effective exchange rate (S$NEER) policy band "up to its prevailing level", while maintaining the slope and width of the band.

This allows the Singapore dollar to appreciate, making imports cheaper.

MAS typically makes its monetary policy decision twice a year — in April and October.

However, the central bank has made off-cycle tightening moves twice this year — in January and July —  in addition to tightening moves in April and last October.

"While Singapore’s growth momentum was expected to slow, MAS had assessed that it was prudent to tighten monetary policy further and lean against price pressures becoming more persistent," the authority said on Monday.

“The policy stance will help dampen inflation in the near term and ensure medium-term price stability, providing the basis for sustainable economic growth.”

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

By adjusting the slope, mid-point and width of the S$NEER, the Singapore dollar is allowed to rise or fall against and an undisclosed basket of currencies of Singapore's main trading partners.

INFLATION ROSE 'MORE THAN EXPECTED'

MAS said core inflation, which excludes the costs of accommodation and private transport, is likely to stay around 5 per cent for the rest of the year and into early next year. 

This is after it rose by more than expected in July to August, to 4.9 per cent year-on-year, from 3.8 per cent in the second quarter of the year.

The major contributor was the inflation for discretionary goods and services, in the midst of robust demand conditions that supported the pass-through of higher imported and domestic costs, MAS said.

The hike in global energy and agricultural costs has also caused a rise in electricity and gas and non-cooked food inflation, while private transport and accommodation inflation accelerated, causing headline inflation to further rise to 7.3 per cent in the July to August period, up from 5.9 per cent in April to June.

“Although the one percentage point increase in the Goods and Services Tax (GST) will result in a one-off step-up in the price level, its effect on inflation should be transitory,” the central bank said.

Overall, core inflation is expected to remain high in the first half of 2023 before slowing more discernibly in the second half as cost pressures gradually ease, it added.

For the whole of 2022, core inflation will average around 4 per cent while headline inflation will average around 6 per cent. 

MAS projects core inflation to come around 3.5 to 4.5 per cent on average in 2023, and headline inflation to come in at 5.5 to 6.5 per cent.

“However, even excluding the one-off effects of the GST increase, core inflation would remain above trend at 2.5 to 3.5 per cent and headline inflation at 4.5 to 5.5 per cent,” it said.

The central bank highlighted upside risks to these forecasts, including fresh shocks to global commodity prices and second-round effects associated with a prolonged period of high inflation.

Economists who spoke to TODAY generally agreed with MAS' assessment of the impact of the GST increase on inflation outlook.

Mr Barnabas Gan, senior economist at RHB bank, said as well that the effect would be transitory.

This is because generally speaking, any year-on-year impact of a GST hike would be "washed out" the following year, though he noted that another increase of the tax is scheduled in 2024.

Economist Song Seng Woon from CIMB bank said that from a computational standpoint, it is "straightforward" that a 1.0 percentage point hike in GST from 7 to 8 per cent would lead to a general rise of similar proportion in the prices of goods and services.

"But a lot will depend on individual businesses, how they can cope with the higher prices, and whether they are looking to pass on all the GST increase to consumers," he added.

Similarly, Ms Selena Ling, chief economist at OCBC bank, said that the exact impact would depend on whether demand cools and whether the "willingness to bear the higher prices softens".

"The implicit assumption here is that the labour market conditions remain tight and wages continue to adjust higher, albeit at a slower pace, so private consumption remains resilient," she added.

ECONOMIC OUTLOOK

MAS said that it expects Singapore’s gross domestic product (GDP) growth to come in at 3 to 4 per cent in 2022.

“In 2023, the economy is forecast to grow at a pace that is below trend, which could cause the current mildly positive output gap to reverse,” it added.

On Monday, the Ministry of Trade and Industry announced that the Singapore economy grew by 4.4 per cent for the months of July to September this year from the same period in 2021.

The 4.4 per cent growth is a slight easing from the 4.5 per cent year-on-year growth recorded in the previous quarter.

On a quarter-on-quarter seasonally adjusted basis, the economy grew 1.5 per cent in the third quarter, reversing the 0.2 per cent contraction it had experienced in the three-month period of April to July.

This effectively means that the economy avoided a technical recession, typically defined as economic contraction in quarter-on-quarter terms for two successive quarters.

Globally, growth in Singapore’s major trading partners will slow to below trend but stay positive in 2023, although shocks, including from geopolitical tensions, could drive inflation higher and cause full-year recessions in some key economies.

Therefore, MAS expects the growth prospects for the domestic manufacturing sector and some trade-related sectors to dim, while the continuing expansions in the domestic-oriented and travel-related sectors will continue to buoy overall economic growth.

“MAS will continue to closely monitor global and domestic economic developments, amid heightened uncertainty on both the inflation and growth fronts,” it said. 

IS RECESSION COMING?

When asked about recession, economists who spoke to TODAY gave a largely gloomy but mixed outlook for next year.

Mr Gan of RHB said: “The base case is for an economic slowdown, but no recession, at least for next year.”

On the other hand, Mr Song from CIMB said that recession risks remain, as the world “keeps a weary eye” on how long consumers and businesses can take the high costs of living and borrowing in their stride. 

“If global central banks are forced to tighten monetary policies more aggressively in the coming months, the higher the risks of recession,” he added.

Ms Ling of OCBC said: “The dark clouds are gathering. The International Monetary Fund already warned that the worst is yet to come and for many people, 2023 will feel like a recession.

“The tug of war between inflation and recession continues — the unknown is whether policymakers will pivot and switch to easing mode if there is a full-blown recession.”

Economists Edward Lee and Jonathan Koh from Standard Chartered Singapore bank said: "Recessionary fears have definitely risen amid rapid and sharp monetary policy tightening by global central banks to counter inflation.

"Our US team is in fact now projecting a full-year recession in the US (-0.2 per cent) in 2023. As for Singapore, we currently have 2.8 per cent forecast for 2023 GDP growth, but we would say that the risk is for that to come below 2.8 per cent."