Singapore tightens monetary policy to fight inflation as first-quarter GDP growth slows

Singapore’s central bank tightened its monetary policy on Thursday (April 14), saying the widely forecast move will slow the inflation momentum as the city state ramps up its battle against soaring prices made worse by the Ukraine war and global supply snags.

The policy tightening, the third in the past six months, came as separate government figures showed Singapore’s economic momentum waning over the first quarter.

The local dollar jumped briefly after the Monetary Authority of Singapore (MAS) recentred the midpoint of the exchange rate policy band known as the Nominal Effective Exchange Rate, or S$NEER, at its prevailing level.

It also increased slightly the rate of appreciation of the policy band. There was no change to the width of the policy band. The MAS manages monetary policy through exchange rate settings, rather than interest rates, because trade flows dwarf its economy, letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed band.

It adjusts its policy via three levers: the slope, midpoint and width of the policy band.

“The war in Ukraine has driven global inflation forecasts higher and dented the outlook for growth,” MAS said in a statement.

“The fresh shocks to global commodity prices and supply chains are adding to domestic cost pressures,” it said, warning that inflation risks remain “elevated over the medium term.”

All 16 economists polled by Reuters expected the MAS to tighten but they were divided on which parameters it would change. Of them, five economists predicted the MAS would increase the slope and recentre the midpoint.

“The door is definitely not closed yet,” said Selena Ling, head of treasury research and strategy at OCBC, referring to another potential tightening in October.

The Singapore dollar strengthened about 0.5 per cent after the statement and hit a one-week high of S$1.3552 per dollar.

The central bank maintained its forecast for gross domestic product to expand from 3 per cent to 5 per cent this year.

Separate advance data on Thursday showed GDP grew 3.4 per cent in January-March on a year-on-year basis, versus economists’ expectations of 3.8 per cent growth, and slower than the 6.1 per cent pace in the fourth quarter of 2021.

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Singapore, a travel and business hub, made its biggest reopening moves from the Covid-19 pandemic through late March and early April, easing local restrictions and allowing vaccinated travellers from anywhere in the world to enter without having to quarantine.

The MAS tightened monetary policy in January in an out-of-cycle move, which followed a tightening in October, joining many other global central banks to get on top of surging inflation.

The US Federal Reserve, which hiked rates last month, has flagged an aggressive path to tightening monetary conditions to tamp down sharp rises in prices.

Earlier on Thursday, South Korea’s central bank hiked rates to their highest since August 2019 in an unexpected move.

The Russia-Ukraine conflict has intensified pressure on consumer prices which were already rising rapidly due to coronavirus-driven supply snags. The Singapore government has said it stands ready to respond with fiscal and monetary measures if a deepening Ukraine crisis impacts growth and inflation.

The MAS said it expects core inflation to come in at 2.5–3.5 per cent this year, versus a prior forecast for 2.0–3.0 per cent. Overall inflation is forecast at 4.5–5.5 per cent, up from the earlier range of 2.5–3.5 per cent.