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Singapore shock sparks forecasts of more tightening in April

·4-min read
Singapore’s central bank isn’t done yet, with economists predicting further tightening at its next scheduled meeting. (PHOTO: Getty Commercial)
The Monetary Authority of Singapore is expected to take further steps to let the local currency appreciate in its April policy announcement, according to economists' forecasts. (PHOTO: Getty Commercial)

By Tomoko Sato and Low De Wei

(Bloomberg) — Singapore’s central bank isn’t done yet, with economists predicting further tightening at its next scheduled meeting after a surprise move Tuesday to blunt rising inflation risks.

The Monetary Authority of Singapore, which uses foreign exchange as its tool to stabilise prices, will take further steps to let the local currency appreciate in its April policy announcement, according to 15 out of 16 economists in a survey and research notes compiled by Bloomberg.

The central bank’s first unscheduled adjustment in seven years, which pushed the Singapore dollar to a three-month high, puts it among global central banks seeking to tighten policy in the face of rising consumer prices. It also comes as the Federal Reserve prepares to begin raising rates in March.

“We expect the MAS to tighten again,” Chua Hak Bin and Lee Ju Ye at Maybank Kim Eng Research Pte. wrote in a note Tuesday. Steps taken so far “may not be sufficient to reduce imported inflation,” as the Singapore dollar is already trading near the top of its policy currency band, they said.

Singapore’s surprise move Tuesday, mixed with higher-than-expected inflation figures from Australia, fed into market skittishness ahead of the Fed’s meeting this week. Those jitters have contributed to a more than 7% drop in global equities in 2022.

The Singapore dollar was little changed at S$1.3439 to the greenback as of 9:19 a.m. local time Wednesday. The currency is up 0.4% versus the dollar so far this year.

Further moves expected in April put Singapore among the forefront of central banks beginning to rein in looser policies that helped economies weather the pandemic. As Covid’s threat to growth fades, the focus has shifted toward controlling inflation driven by supply-chain disruptions, higher commodities prices and fiscal stimulus.

Surging Inflation

Unlike most central banks, Singapore uses foreign exchange as its main policy tool, guiding the local dollar against a basket of trade-partner currencies. In its statement Tuesday, the MAS said recovering global demand and supply-side issues had pushed prices higher since its last meeting in October.

For its core inflation measure — which last month hit the highest level since July 2014 — the MAS cited rising energy and elevated imported-food prices, as well as rising airfare and wages growing above historical averages amid a tight domestic labor market.

Its last two actions — a scheduled announcement last October and Tuesday’s surprise adjustment — called for its main policy band to “increase slightly,” while leaving the center and width of the band unchanged. Going forward, economists are mixed on what steps the MAS may take, with some seeing further steepening and others saying the band will be re-centered higher.

Because the MAS doesn’t release details of its policy settings, economists and trading desks create their own models for the currency basket and policy band. Barclays Plc, for example, expects the band to be re-centered 150-200 basis points higher in April, followed by a 50 basis point slope increase in October.

“The MAS’s decision to tighten ‘inter-meeting’ indicates that policy makers are on high alert over inflation and thus likely to favour more, not less, FX policy tightening in the near term,” Barclays economists including Brian Tan wrote in a note. “We expect more signs of labor shortages to emerge, pushing the MAS’s assessment of the balance of risks further toward inflation.”

Survey Says...

The 16 survey and research results compiled by Bloomberg include the following:

  • 15 see the MAS tightening in April

  • 9 believe the slope of the policy band will be increased, with estimates ranging from 50 basis points to 200 basis points

  • 14 see the policy slope currently allowing at least 1% appreciation per year, while one sees it already at 2%

  • 6 expect the policy band to be re-centered higher

  • None sees the band being widened

“Given building core inflation pressures alongside a still strong growth outlook, we continue to expect MAS to increase the slope” of the policy band to 2% per year, economists at Goldman Sachs Group Inc. wrote in a report.

While Goldman’s base case doesn’t include re-centering of the band, “further upside surprises to core inflation in coming months would increase the probability of a one-off re-centering, while lowering somewhat the probability of a 100 basis point slope increase at the April meeting,” the firm’s economists said.

(Updates market moves in fifth and sixth paragraphs.)

©2022 Bloomberg L.P.