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Singapore Monetary Policy October 2021

Singapore: MAS tightens monetary policy in October

At its 14 October meeting, the Monetary Authority of Singapore (MAS) raised the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band from 0.0% previously, thus allowing the dollar to appreciate “slightly” on an annual basis—widely believed to be 0.5% per annum—and effectively tightening its monetary stance. However, there was no change to the width of the policy band or the level at which the band is centered. The Singapore dollar is managed against a basket of currencies and the MAS operates a managed float regime, with the currency fluctuating within a policy band where the level and direction are decided by the Authority in order to accommodate short-term volatility in foreign exchange markets as well as ensure medium-term price stability. The Authority thus gives up its ability to control domestic interest rates, which are instead largely determined by international lending rates and expectations of future movements in the Singapore dollar.

The decision, which surprised most market analysts, reflected confidence in the recovery of the economy, and also preempted concerns regarding rising inflation. The Authority expects core inflation—the key variable that it tracks—to clock between 0.0% and 1.0% this year, before rising to between 1.0%–2.0% in 2022. Meanwhile, the MAS reiterated its forecast for the economy to expand between 6.0%–7.0% this year, before continuing to grow above trend in 2022. As such, the Authority decided it had space to tighten its stance.

In its communiqué, the Authority did not explicitly indicate future policy direction, but commented that the “appreciation path for the S$NEER policy band will ensure price stability over the medium term while recognizing the risks to the economic recovery”.

Looking ahead, analysts at Goldman Sachs see potential for further tightening at the next MAS policy meeting, commenting:

“The case for a reopening-led rebound into early 2022 remains strong, in our view, with above-trend (but slowing) growth thereafter. Core inflation is also likely to rise over the coming year due to higher import costs, narrowing slack and an improving labor market. We maintain our baseline that MAS tightens in April next year, with another 50bp increase to the MAS NEER slope to 1.0%/annum (from 0.5%/annum currently).”

This is something Khoon Goh, head of Asia research at ANZ, agrees with, stating:

“Should the economy continue to evolve in line with MAS expectations, we expect them to tighten policy again at their April 2022 MPS, taking the slope of the policy band to 1% per annum. Given inflationary pressures and our expectation that the labour market will be tight over the course of 2022, we see MAS increasing the slope at the October 2022 meeting as well to take it to 1.5% per annum.”

The MAS conducts semiannual meetings, with the next monetary policy statement due in April 2022.

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