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Singapore tightens monetary policy in surprise move as price pressures mount

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SINGAPORE – Singapore’s central bank unexpectedly tightened its monetary policy on Thursday, making its first such move in three years, amid mounting cost pressures caused by supply constraints and a recovery in the global economy.

The city-state joins a group of economies globally that have begun to reduce the strong monetary stimulus of the pandemic era, as the threat of inflation outweighs the growth risks posed by the coronavirus.

The central bank, which manages its policy through the exchange rate setting, said it would raise the slope of its monetary policy band slightly, from zero percent previously.


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Irvin Seah, a senior economist at DBS, said the move was the result of growth and inflation emerging from a recession.

“This is a recalibration to be in line with economic fundamentals and I do not anticipate any further adjustment unless we see upside risk in growth and inflation,” he said.

Singapore, reeling from last year’s record recession triggered by the COVID-19 pandemic, is beginning to reopen its borders with 84% of its population fully vaccinated against the virus. The economy is expected to grow between 6% and 7% this year.

Only two financial institutions, including DBS, had expected an adjustment, and 11 others predicted that the Monetary Authority of Singapore (MAS) would remain on hold, in a Reuters poll.


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Instead of using interest rates, the MAS manages monetary policy by allowing the Singapore dollar to rise or fall against the currencies of its major trading partners within an undisclosed band.

It adjusts its policy through three levers: the slope, the midpoint, and the width of the policy band, known as the nominal effective exchange rate, or S $ NEER.

The width of the band and the level at which it is centered will not change, the MAS said.

“This path of appreciation of the S $ NEER policy band will ensure price stability in the medium term while recognizing the risks for the economic recovery,” MAS said in its statement.

The central bank expects growth to approach its potential again next year, despite shocks such as a resurgence of the virus or a setback in the economic reopening.


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He said core inflation, the central bank’s preferred price measure, is expected to rise to 1-2% next year and almost 2% in the medium term.

It was the first adjustment since October 2018. Most economists expected the MAS to only begin normalizing policy in April 2022.

Increasing the slope of the policy band effectively increases the value of the local dollar in Singapore’s trade-dependent economy, theoretically making imports cheaper and exports more expensive.

Policymakers around the world are increasingly concerned about the effects of rising materials costs, driven by supply chain bottlenecks and as economies reopen after coronavirus lockdowns.

By 2021, the MAS expects core inflation to be near the upper limit of the forecast range of 0-1%. The key price indicator rose at the fastest pace in more than two years in August.


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The Singapore dollar rose about 0.3% after the policy announcement to a three-week high of S $ 1.3475 per dollar, before easing slightly to S $ 1.3490.

Bank of Singapore analyst Moh Siong Sim said the change was a “hard surprise” but modest enough to keep the currency at bay.

“It is taking small steps towards policy normalization, but it makes sense given the context of rising global inflation,” he said.

MAS expects growth in Singapore’s pioneering economy to remain above trend in the coming quarters.

“At the same time, external and internal cost pressures are building, reflecting both the normalization of demand and tight supply conditions,” he said.

Preliminary data on Thursday showed that Singapore’s economy grew 6.5% in the third quarter, in line with economists’ forecasts.

MAS said GDP growth should trend slower but still above trend in 2022.

“I think there is a 50-50 chance that MAS will also tighten in April because they are doing a very slow and gradual tightening process, so they could tighten again a bit,” said Jeff Ng, an economist at HL Bank. (Reporting by Aradhana Aravindan, Anshuman Daga, Chen Lin, Joe Brock, and Tom Westbrook; Edited by Sam Holmes)



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