Singapore Tightens in Surprise Move, Sending Currency Higher


Singapore unexpectedly tightened monetary policy to join the global fight against accelerating inflation, sending its currency to the strongest since October.

The Monetary Authority of Singapore, which uses foreign exchange as its main policy tool, made its first unscheduled action since 2015 on Tuesday, a day after the government flagged uncertainty over its inflation outlook as consumer prices rose the fastest in eight years. Given the continued inflation risks, economists expect further action at its next meeting in April.

The MAS joined a wave of global policy tightening in the run-up to the U.S. Federal Reserve’s first meeting of the year, in which it’s likely to pave the way for interest-rate increases starting in March. Central banks globally are beginning to rein in looser policies that helped economies weather the pandemic as inflation risks mount from supply chain disruptions, rising commodities prices and fiscal stimulus.

Rising Uncertainty

“This allows MAS more breathing space,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “They don’t want to trip over the same transitory aspects and signaling that the Fed did. There is value for MAS in doing this sooner rather than later.”

In a statement Tuesday, the MAS signaled it’s allowing the local currency to appreciate against its peers in the months ahead to counter imported cost pressures. In technical terms, it will “raise slightly the rate of appreciation” of its main currency band, while keeping its width and center unchanged.

The Singapore dollar traded 0.3% higher at 1.3430 the U.S. dollar at 12:03 p.m. local time.

Singapore, which relies heavily on imports, had already taken steps toward tightening in October, when it unexpectedly raised the appreciation path of the currency band.

The MAS noted Tuesday that inflation has shifted higher since that decision, and that “pandemic-related and geopolitical shocks” pose risks for further increases. It also raised its inflation forecasts for 2022, projecting core prices to rise 2% to 3%, from 1% to 2% expected in October.

“While core inflation is expected to moderate in the second half of the year from the elevated levels in the first half as supply constraints ease, the risks remain skewed to the upside,” the MAS said.

What Bloomberg Economics Says…

“The Monetary Authority of Singapore’s surprise tightening — ahead of its next regularly scheduled meeting in April — was probably aimed at preserving household spending power that’s threatened by the emergence of acute food price pressures. Whether the MAS tightens again in April will probably depend on the state of supply bottlenecks at the time.”

— Tamara Mast Henderson, Asean economist

Further tightening is possible in the central bank’s April announcement, according to economists at Oversea-Chinese Banking Corp. and Bank of America Corp.

“The key determinant would be whether core inflation peaks at the 3% handle and stabilizes, or if private consumption remains very buoyant to drive car and accommodation prices higher,” said Selena Ling, head of Treasury Research & Strategy at OCBC in Singapore, adding there could be further pressure from coming domestic fee adjustments and imported inflation.

The city-state’s economic recovery is expected to extend to domestic-focused and travel-related areas this year as pandemic restrictions are eased, the MAS said Tuesday. Gross domestic product on track to grow 3% to 5% this year, it added, reiterating a government forecast in November.