Singapore central bank unlikely to tighten policy

What remains to be seen is whether the Monetary Authority of Singapore (MAS) deems it fit to flag the risk of higher inflation and rates expected to emerge later in the year in some advanced economies, especially the United States.

SINGAPORE: With inflationary pressures benign and major central banks most probably keeping their interest rates low for now, Singapore’s central bank is likely to maintain its easing monetary policy stance this week.

What remains to be seen is whether the Monetary Authority of Singapore (MAS) deems it fit to flag the risk of higher inflation and rates expected to emerge later in the year in some advanced economies, especially the United States.

Central banks usually add a new sentence or reword parts of their policy statements to flag risks. MAS can also tweak the policy band within which the exchange rate moves to communicate its concerns.

Interest rates in Singapore have typically stayed a tad below US interest rates. Bond yields in the US have spiked from lows they hit last year, but the Federal Reserve continues to hold the line on its policy to keep rates low – aggressively, if needed.

The correlation with US rates has developed over the last 40 years, and reflects market expectations of a trend appreciation over time of the Singapore dollar that MAS uses as the instrument of managing monetary policy, rather than the worldwide norm of using benchmark domestic interest rates.

The choice of the exchange rate as a policy tool is predicated on the Singapore economy’s small size and high degree of openness to trade and capital flows.

The exchange rate acts directly to dampen imported inflationary pressures that have an overwhelming influence on local prices, given that Singapore imports most of what it consumes.

MAS in its last biannual policy review in October last year reduced the Singdollar appreciation rate to nil for the first time in more than three years to complement fiscal, liquidity and financial policies aimed at supporting the economy through the Covid-19 downturn.

The move was in contrast to the previous “modest and gradual appreciation” path within a trade-weighted basket of currencies of major trading partners. MAS said at the time that the stance was appropriate, given the deterioration in economic conditions and weaker inflation outlook.

Singapore’s gross domestic product (GDP) shrank 5.4% last year, while both MAS core inflation – which excludes accommodation and private transport components – and the consumer price index (CPI)-All Items inflation, the headline inflation indicator, averaged 0.2%.

The GDP contraction could have been much worse but for the last two quarters of last year, when economic growth started to rebound from the depths of the recession, aided by relaxations to the circuit breaker measures and facilitated by supportive fiscal and monetary policies.

The Trade and Industry Ministry’s latest growth forecast stands at 4% to 6% this year.

Inflation has also picked up, with MAS core inflation rising 0.2% year-on-year in February and the CPI-All Items inflation up 0.7%, both recording their fastest gains in 13 months.

While MAS expects its core inflation indicator to average between 0% and 1% this year, the forecast range of -0.5% to 0.5% for the CPI-All Items inflation is being reviewed amid the sharper-than-expected rise in prices of non-core items.

A revised forecast range will be released soon along with the policy statement. Analysts said headline inflation is on the rise for most of Singapore’s trading partners as well. However, the build-up in cost pressures for now reflects rising raw material prices as well as supply chain disruptions.

Gains in core inflation that usually trigger tighter monetary policy by central banks may not be as great, given that most economies have yet to completely emerge from Covid-19 lockdowns.

Partial lockdowns and other restrictions are likely to keep the output gap for most economies, including Singapore’s, negative –indicating a lack of demand for goods and services or that the economy is not running at full capacity.

Morgan Stanley expects headline CPI to rise cyclically this year but stay benign, helping the MAS to maintain the status quo on its policy stance. Irvin Seah, a senior economist at DBS Bank, said MAS will not change its stance since the economy is not back to its pre-Covid-19 level, there is still slack in the labour market, and the output gap remains negative. – The Straits Times/ANN

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