MAS likely to tighten monetary policy further in response to rising inflation: analysts

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SINGAPORE: The Monetary Authority of Singapore (MAS) is expected to tighten monetary policy further next month to strengthen the Singapore dollar and curb rising inflation, analysts say.

Singapore’s core inflation rose again to 5.1 percent in August, approaching a 14-year high, it emerged on Friday (September 23). The total consumer price index, or headline inflation, also rose to 7.5 percent.

The MAS typically adjusts monetary policy twice a year, in April and October. But in 2022, the MAS tightened the policy three times, once in April and twice in impromptu announcements in January and July.

As inflation is expected to continue to climb, “the stage may be set for another tightening,” said Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank.

MUFG Bank’s senior currency analyst Jeff Ng also said he expects inflation to continue rising due to “a combination of supply and demand factors”.

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Food inflation, which stood at 6.4 percent in August, is likely to remain high, mainly driven by the cost of meat and fish, Mr Ng said. He added that core inflation components are also likely to come under pressure from high input costs.

MUFG Bank has raised its 2022 inflation forecast to 6.3 percent (from 5.5 percent) and its core inflation forecast to 4.2 percent (from 3.5 percent).

OCBC Bank’s forecasts of 5.9 percent for headline inflation and 4.2 percent for core inflation remain unchanged, Ms Ling said. “But recent developments, such as the escalation of the war between Russia and Ukraine and the ban on India’s rice exports, imply further upward external price risks in addition to domestic wage pressures,” she added.

Maybank raised its forecasts slightly to 4.2 percent for core inflation (from 4 percent) and 6.2 percent for headline inflation (from 6 percent). This is “to account for the larger-than-expected increase in food and service costs,” said Maybank analysts Chua Hak Bin and Lee Ju Ye.

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MAS’ monetary policy is impacting the strength of the Singapore dollar.

Unlike most central banks that conduct monetary policy through interest rates, MAS uses the exchange rate as its main policy tool. It floats the exchange rate within an unspecified policy band and changes the slope, width and center of that band as it seeks to adjust the rate of appreciation or depreciation of the Singapore dollar.

Analysts said MAS is most likely to re-center the Singapore dollar’s nominal effective exchange rate (S$DEER) at the prevailing level, as it has done before. The S$NEER is currently estimated to be about 1.5 percent above the implied midpoint, Maybank analysts said.

Mr Ng said the Singapore dollar is expected to continue to outperform other regional currencies such as the Indian rupee, Thai baht and Philippine peso.

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The Singapore dollar has strengthened and traded at record levels against several currencies, such as the Japanese yen. At the beginning of the year, one Singapore dollar would set you back about 85 yen. This has since risen to over 100 yen.

Japan intervened in the foreign exchange market on Thursday to buy yen for the first time since 1998, in a bid to support the battered currency after the Bank of Japan (BOJ) was stuck with ultra-low interest rates.

The local currency has also strengthened against the pound as the UK faces the highest inflation it has seen in 40 years.

At the start of the year, one pound could rise above S$1.80. On Friday, that figure was S$1.58.

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