The Monetary Authority of Singapore (MAS) announced on 29 January that it will continue its existing exchange rate-based monetary policy, marking the third consecutive meeting without changes.
This decision aligns with the predictions of market analysts and reflects the authority’s commitment to economic stability.
MAS confirmed in its monetary policy statement that the “prevailing rate of appreciation” of the Singapore dollar nominal effective exchange rate (S$NEER) policy band will remain constant. Additionally, there will be no alterations to the width and central level of this policy band.
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This decision was anticipated by all 13 analysts surveyed by Reuters prior to this scheduled policy review. During the two reviews in 2023, MAS maintained the same monetary policy, with the most recent adjustment being a re-centering of the mid-point of its policy band in October 2022.
Unlike many central banks that use interest rates to guide monetary policy, MAS uniquely manages its approach by controlling the local dollar’s value against the currencies of its major trading partners within a confidential range, known as the S$NEER. It achieves this through modifications to the slope, mid-point, and width of the policy band.
Economic and Inflation Forecast
Looking ahead, MAS provided an optimistic outlook for Singapore’s economy, predicting a gross domestic product (GDP) growth of 1% to 3%. This positive forecast is supported by a revival in the global electronics sector and expected easing of global interest rates, which are likely to boost the manufacturing and financial sectors.
Additionally, growth in domestically-focused sectors is anticipated to return to pre-pandemic levels.
On the inflation front, the central bank expects core inflation, which excludes accommodation and private transport costs, to remain high in the early part of the year. This is partly due to the “one-off” impact of a 1-percentage-point increase in the Goods and Services Tax (GST) and a rise in the carbon tax.
In the second quarter, water prices are expected to increase as part of a phased approach to address higher production costs. Inflation in specific service areas, such as public transport and healthcare, will likely remain high as prices adjust to elevated cost levels.
However, MAS anticipates that core inflation will gradually decrease, with a significant reduction expected by the fourth quarter and a further decline next year. The central bank forecasts core inflation to average between 2.5% and 3.5% for 2024, consistent with previous estimates.
Excluding the GST rate increase, core inflation is predicted to be between 1.5% and 2.5%.
“The sustained appreciation of the policy band will continue to dampen imported inflation and curb domestic cost pressures, thus ensuring medium-term price stability,” MAS stated.
Nevertheless, the central bank has revised its overall inflation estimates downward to 2.5% to 3.5%, from the previous range of 3% to 4%. This adjustment reflects the decline in certificate of entitlement (COE) premiums since November and an increased COE supply this year compared to 2023. Excluding the GST rate impact, headline inflation is forecast at 1.5% to 2.5%.
MAS acknowledges the potential for both positive and negative shifts in the inflation outlook.
“Shocks to global food and energy prices or domestic labour costs could bring about additional inflationary pressures. However, an unexpected weakening in the global economy could induce a faster easing of cost and price pressures,” it stated.
Economists from Mizuho Bank and ING said that MAS is likely to maintain its current policy settings for the foreseeable future, given the ongoing concerns about persistent inflation and external geopolitical uncertainties.
Nicholas Mapa, ING’s senior economist, anticipates that the authority may hold its position for at least another meeting.
“However, should inflation moderate towards the second half of the year as forecast, the MAS could consider adjusting policy settings at their third or fourth meeting of the year,” he added.
This meeting marks the first January policy statement by MAS, following its transition to a quarterly review schedule, as announced last year. This change from a semi-annual to a quarterly review is seen as a strategic move to stay agile in an increasingly unpredictable global environment. The authority will now conduct policy reviews in January, April, July, and October.
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