July 23 2024: Singapore’s central bank is widely expected to maintain its current monetary policy settings this week, refraining from easing amid persistent inflation risks driven by geopolitical tensions. Of the 10 analysts polled by Reuters, nine anticipate that the Monetary Authority of Singapore (MAS) will keep its policy unchanged during the scheduled review on Friday.
Inflation Concerns:
“The MAS is likely in no rush to ease policy setting, with core inflation still above its soft 2% target,” said Lloyd Chan, senior currency analyst at MUFG Global Market Research. Core inflation is projected to return to the 2% level only by early 2025, with upside risks from rising global freight costs and geopolitical tensions. Additionally, Singapore’s economic growth picked up in Q2, with indicators suggesting further improvement in the coming months.
Inflation in Singapore, while cooled from a peak of 5.5% in early 2023, remained at 3.1% year-on-year over April to May and dropped to 2.9% in June. MAS Managing Director Chia Der Jiun expects core inflation to continue on its disinflation path and ease more significantly in the fourth quarter, aiming for around 2% in 2025, barring further shocks.
Economic Growth:
Chia also expects Singapore’s full-year economic growth to align closer to its potential rate of 2% to 3%, within the upper half of the trade ministry’s 1% to 3% forecast range. Central banks globally are gradually cutting rates, with the European Central Bank leaving rates steady this month after a first cut in June, and the Federal Reserve is expected to deliver its first cut in September.
Monetary Policy Mechanism:
Instead of using interest rates, Singapore manages monetary policy by allowing the Singapore dollar to fluctuate against the currencies of its main trading partners within an undisclosed band, known as the Singapore Dollar Nominal Effective Exchange Rate (S$NEER). The MAS adjusts policy through three levers: the slope, mid-point, and width of the policy band.
While DBS anticipates a possible loosening of monetary policy this week, with scope for MAS to slightly ease the appreciation pace of the band in the second half, Barclays suggests that the risk of a tightening via an increase in the slope is more likely than an easing, though the overall probability of an adjustment remains low.
Economic Indicators:
Singapore, often viewed as a bellwether for global growth due to its international trade surpassing its domestic economy, saw growth slow to 1.1% in 2023 from 3.8% in 2022. Preliminary GDP rose 2.9% on a year-on-year basis in the second quarter of 2024, stronger than expected, prompting economists to upgrade their forecasts.
Policy Background:
The MAS has not changed policy since a tightening in October 2022, marking the fifth consecutive tightening amid broader concerns about growth. Chia noted that without the tightened monetary policy, core inflation would have reached 7% and headline inflation 8%. Core inflation peaked at 5.4% in Q1 2023, and headline inflation at 7.3% in Q3 2022.
In 2024, the MAS began making policy announcements quarterly instead of semiannually.