Aradhana Aravindan & Anshuman Daga

SINGAPORE, (Reuters) – Singapore’s central banks tightened their monetary policy Thursday. The move was widely predicted to slow down inflation momentum. This is as Singapore intensifies its fight against soaring costs caused by rising prices and supply snags.

This was the third policy tightening in six months. Separate data also showed that Singapore’s economic momentum had slowed over the first quarter.

Shortly after the Monetary Authority of Singapore’s (MAS) re-centering the midpoint of the policy range known as Nominal Effective Rate (or S$NEER), the local dollar jumped. This also increased the appreciation rate slightly.

The MAS was able to use both tools at once for the first-time in 12 years. This underscored policymakers’ concern about price stability, and has led the U.S. Federal Reserve to take a more aggressive approach to tightening monetary policy.

The MAS policy band was unchanged in its width.

“The war in Ukraine caused global inflation forecasts to rise higher, and has degraded the outlook for growth,” MAS reported in a statement.

The report stated that the “new shocks to global commodities prices and supply chains are increasing domestic cost pressures”, warning that inflation risks will remain “highly elevated over the medium-term.”

Singapore, a major travel and business hub, made its biggest reopening moves https://www.reuters.com/world/asia-pacific/singapore-relax-more-covid-curbs-including-overseas-arrivals-2022-03-24 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.

MUCH TIGHTER?

Selena Ling of OCBC’s treasury strategy and research said, “The door has not been closed yet.” She was speaking about another tightening that could occur in October.

Because of the size and influence of trade flows, the MAS sets exchange rates rather than interest rate to manage monetary policies. The result is that the Singapore dollar can rise or fall in relation to the currencies its principal trading partners.

The policy adjusts using three levers: slope, middle-point, and width.

Reuters polled all 16 economists, and they agreed that the MAS would tighten. However, there was disagreement over which parameters.

After the announcement, the Singapore dollar gained 0.5% and reached a high of S$1.3552 per $1 for a week.

The central bank kept its prediction that gross domestic product would grow by 3% to 5.5% this year. In 2021 the economy saw 7.6% growth, which was the fastest rate in a decade. It had recovered from the 4.1% pandemic-induced contraction in the year prior.

Separate data from Thursday indicated that GDP increased 3.4% year-on-year in January-March, which was lower than economists expected. It also grew slower than the 6.1% rate in the fourth quarter 2021.

The MAS tightened monetary policy in January in an out-of-cycle move, which followed a tightening in October https://www.reuters.com/markets/currencies/singapores-central-bank-tightens-monetary-policy-inflation-risks-2022-01-25, joining many other global central banks, led by the Fed, to get on top of surging inflation.

Unexpectedly, South Korea’s central banks raised interest rates by 5% on Thursday.

Russia-Ukraine war has increased pressure on consumer prices, which had been rising quickly due to coronavirus-driven supply problems. The Singapore government has said it stands ready https://www.reuters.com/world/asia-pacific/singapore-can-deploy-more-fiscal-monetary-policy-measures-if-needed-finmin-2022-03-22 to respond with fiscal and monetary measures if a deepening Ukraine crisis impacts growth and inflation.

MAS indicated that it will continue to monitor developments in the environment outside Singapore and their effect on Singapore’s economy.

It expects core inflation to come in at 2.5–3.5% this year, versus a prior forecast for 2.0–3.0%. Overall inflation is forecast at 4.5–5.5%, up from the earlier range of 2.5–3.5%.

Khoon Goh of ANZ’s Asia Research, stated, “The MAS completely recognise that if inflation continues to surprise on the upside, there is a possibility they need to do more at future policies meetings.”