The Monetary Authority of Singapore (MAS) yesterday tightened monetary policy for the first time in three years, the latest country to act against inflation as COVID-19-hit economies reopen amid continuing supply chain bottlenecks.
The world’s central bankers are walking a fine line between supporting economic recovery with easy financial conditions while preventing a long-term increase in prices.
The move by Singapore’s central bank came as the economy grew 6.5 percent year-on-year in the third quarter, according to preliminary estimates, extending the nation’s recovery from its worst-ever recession last year due to the pandemic.
The MAS sees growth “likely to remain above trend in the quarters ahead,” it said in a statement.
Singapore has taken a strategy of living with the virus by ramping up its vaccination rate — currently at about 85 percent — as it opens up its economy and eases travel restrictions for people who have been vaccinated.
Central banks globally are becoming worried that inflation could become more persistent than originally expected, and are beginning to ease stimulus measures.
The US Federal Reserve is set to slow its asset-purchase program, while Singapore joins Brazil, Mexico, New Zealand, Norway and South Korea in tightening policies.
“MAS’ move is in response to concerns that inflation globally may stay elevated for longer than what may be currently perceived,” CIMB Private Banking regional economist Song Seng Wun (宋城煥) said.
“For Singapore, which imports everything from food on the table to shoes, it is inevitable that a stronger exchange rate is needed to contain inflation as much as possible,” Song said.
This is all the more crucial as the economy is expected to continue growing into next year with further opening up and as travel gains pace, he said.
The MAS forecast that core inflation, which strips out costs of private transport and accommodation, this year will be at the upper end of its 0 to 1 percent estimate, then average 1 to 2 percent next year.
All-item inflation this year should be about 2 percent, compared with earlier expectations of 1 to 2 percent, and average 1.5 to 2.5 percent next year, it said.
Quickening inflation “in the quarters ahead” rests on imported cost pressures from a strengthening recovery in global demand and on supply constraints that have sent commodity prices soaring worldwide, the MAS said.
Singapore conducts monetary policy through the exchange rate in which the Singaporean dollar is managed against the currencies of its major trading partners.
The MAS said that it would “raise slightly” the slope of the Singapore dollar’s exchange policy band from 0 percent, which would allow for a modest appreciation of the unit.
This “will ensure price stability over the medium term while recognizing the risks to the economic recovery,” it said.
The Singaporean dollar rose 0.3 percent after the announcement, its strongest gain against the US dollar since Sept. 23.
Additional reporting by Bloomberg
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