Inflation battle continues as Singapore holds firm on currency policy

12-4-2024 (SINGAPORE) In its ongoing efforts to combat persistent inflation, the Monetary Authority of Singapore (MAS) has decided to maintain its current monetary policy stance aimed at strengthening the trade-weighted Singapore dollar.

On April 12, the central bank announced that it will keep the prevailing rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band unchanged, leaving the width of the band and the level at which it is centred untouched. These parameters indicate the extent and pace at which MAS wants the local currency to appreciate.

The MAS also left its inflation forecasts for 2024 unrevised, projecting both headline and core inflation – which excludes private accommodation and transport costs – to average between 2.5% and 3.5%.

“MAS core inflation is likely to remain elevated in the earlier part of the year but should decline gradually and step down by the fourth quarter, before falling further next year,” the central bank stated in its monetary policy statement.

Justifying its decision, the MAS noted, “The prevailing rate of appreciation of the policy band is needed to keep a restraining effect on imported inflation as well as domestic cost pressures and is sufficient to ensure medium-term price stability.”

This move comes after a series of five policy tightenings between October 2021 and October 2022, before the MAS paused its actions.

The decision to hold its stance was widely anticipated by economists, following a sharper-than-expected rise in core inflation to 3.6% year-on-year in February, the highest level since July 2023. The spike was partly attributed to higher services and food inflation linked to Chinese New Year spending.

With core inflation stubbornly above the widely perceived 2% target, all 20 economists surveyed by Bloomberg News had forecast the central bank to maintain its overall policy settings.

The MAS decision also follows recent developments in other major economies. In the United States, hotter-than-expected inflation data has pushed back expectations for an interest rate cut by the Federal Reserve to later in the year. Meanwhile, the European Central Bank (ECB) held its policy stance unchanged on April 11, although ECB President Christine Lagarde kept alive hopes of a possible rate cut in June.

Explaining the persistence of inflation in Singapore, the MAS cited the recent hike in water tariffs as a contributing factor, along with rising prices of certain services such as education and healthcare, which had remained muted in recent quarters.

“Nevertheless, as imported and domestic cost pressures continue to abate, underlying inflation should moderate further,” the central bank added.

However, the MAS acknowledged that both upside and downside risks to the inflation outlook remain. Shocks to global food and energy prices or stronger-than-expected domestic labour demand could exert additional inflationary pressures. Conversely, an unexpected weakening in the global economy could accelerate the easing of cost and price pressures.

Meanwhile, advanced estimates released by the Ministry of Trade and Industry on April 12 showed that Singapore’s economy grew by 2.7% year-on-year in the first quarter of 2024, driven by a resurgence in services-producing industries amid increased tourist arrivals.

However, growth slowed to 0.1% on a seasonally-adjusted quarterly basis, down from 1.2% in the fourth quarter of 2023, as manufacturing and modern services activity moderated after strong expansions in previous quarters.