SINGAPORE – Singapore’s central bank kept unchanged its monetary policy stance which favours an appreciating trade-weighted Singapore dollar, but lowered its estimate of the all-items consumer price index (CPI) in a sign that inflationary pressures are easing.
The Monetary Authority of Singapore (MAS) said on July 26 that it will maintain the prevailing rate of appreciation of the Singapore dollar nominal effective exchange rate (S$Neer) policy band, with no change to the width of the band or the level at which it is centred on.
These are parameters that indicate how high and how fast the central bank wants the currency to appreciate.
It also expects a pick-up in the growth momentum, saying the Singapore economy should improve in the second half of 2024.
Gross domestic product growth is likely to come in closer to its potential rate of 2 per cent to 3 per cent for the full year, the MAS added. That is compared with the Ministry of Trade and Industry’s official forecast of 1 per cent to 3 per cent.
MAS trimmed its projection for 2024 all-items CPI, or the headline inflation, to 2 per cent to 3 per cent, from an earlier forecast of 2.5 per cent to 3.5 per cent. It said the cut mainly reflected lower-than-anticipated private transport inflation in recent months.
The central bank announced on July 23 that it was reviewing its forecast for the measure after data in the CPI report for June showed headline inflation fell to an annual rate of 2.4 per cent from 3.1 per cent in May. That was the lowest rate since August 2021 and was below the 2.7 per cent forecast in a Bloomberg poll of analysts.
MAS kept its forecast for core inflation – which excludes private accommodation and transport costs and better reflects household expenses – unchanged at 2.5 per cent to 3.5 per cent.
Core inflation in June also posted a surprise retreat. It eased to 2.9 per cent, its first drop in three months and the lowest level since March 2022. The core measure, which better reflects cost pressures on most households in Singapore, was tipped to rise to 3 per cent in the Bloomberg poll.
MAS said core inflation is expected to step down more discernibly in the fourth quarter this year and fall further to around 2 per cent in 2025.
The expected decline in inflation will come despite the recent uptick in shipping freight rates, because global producer prices – which are quoted for manufactured goods – have risen only modestly thus far, said the central bank.
Global crude oil prices have fallen from their recent peak in April, while prices of most food commodities as well as intermediate and final goods have been stable, MAS noted.
“Meanwhile, domestic unit labour costs should rise at a significantly slower rate this year compared to the preceding two years, amid the dissipation of labour market tightness and an anticipated pick-up in productivity,” it added.
Unit labour costs refer to how much a business pays its workers to produce one unit of output.
“MAS will therefore maintain the prevailing rate of appreciation of the S$Neer policy band. There will be no change to its width and the level at which it is centred,” the central bank said in the July 26 monetary policy statement.
“Against this backdrop, current monetary policy settings remain appropriate. The prevailing rate of appreciation of the policy band will keep a restraining effect on imported inflation as well as domestic cost pressures, and ensure medium-term price stability,” it noted.
The MAS decision to leave its tight monetary policy settings unchanged for now was widely expected, given that core inflation is still above the 2 per cent level that most analysts believe is the central bank’s soft target.
Unlike most central banks, which manage inflation by setting interest rates, MAS maintains price stability by allowing the value of the Singdollar to move against the currencies of its main trading partners within an undisclosed band.
The Singdollar policy band is referred to by MAS as S$Neer.
MAS tightened its policy five times between October 2021 and October 2022 before pausing.
Surging inflation at home and abroad since 2021 has prompted MAS to allow the Singdollar to appreciate at a quicker pace within the policy band. Most analysts estimate that it has risen 1.5 per cent to 1.9 per cent above the midpoint of the band.
Ms Sheana Yue, an economist at consultancy Oxford Economics, said the MAS statement sounded relatively optimistic on the prospects for further disinflation, with the central bank noting easing food inflation and slower wage growth.
“The key question for the policy outlook now is whether the MAS would act to loosen policy when it sights the core rate trending towards its target – monetary policy after all is supposed to be forward looking – or whether it waits until core inflation is firmly near 2 per cent,” she added.
Ms Yue said her base case is that the MAS will start to loosen policy in October.
“The key risk to our call is a slower-than-expected disinflation which may prevent the MAS from reducing policy tightness pre-emptively,” she noted.
The MAS did warn in the statement of both upside and downside risks to its inflation outlook.
“The pace of domestic labour cost increases may reaccelerate if aggregate demand turns out stronger than expected, causing renewed inflationary pressures. An intensification of geopolitical tensions could also add to imported costs,” it said.
“However, if global interest rates stay high for longer than expected, external demand could weaken and dampen the growth momentum in the Singapore economy. This, in turn, would induce a faster pace of easing in cost and price pressures,” it noted.
MAS’ policy statement, which came out at 8am, provoked little response from the currency market. The Singapore dollar traded steady at 1.3430 against the US dollar.
DBS Bank’s senior FX strategist Philip Wee expects the local dollar to trade in a higher 1.32-1.34 range later in the year as Singapore’s core inflation eases in line with the MAS forecast, and the US dollar weakens in response to interest rate cuts that the US Federal Reserve is likely to deliver before end-2024.