- Monetary Authority Singapore Managing Director Ravi Menon at the annual report media conference remarked the nation’s core inflation is projected to increase to a peak of 4.0-4.5% in Q3 before levelling off, and slightly ease towards the end of this year, though still around 3.5-4.0% which is much higher than what Singapore has been used to.
- For the whole of 2022, core inflation is forecast to come in at 3.0–4.0%. As car and accommodation cost increases are likely to remain firm, CPI-All Items inflation is expected to come in at 5.0–6.0%. Inflation is expected to ease further in 2023 but will remain well above the 1.5% rate averaged since 2000.
This inflation outlook is not without upside risks.
- The projected profile of inflation is based on two assumptions, some stabilisation of global commodity prices and unwinding of global supply chain constraints; and a strong pick-up in inflows of non-resident workers that helps to alleviate domestic labour shortages. If there are fresh shocks to global energy and food supplies arising from the ongoing conflict in Ukraine or a significant overheating of the domestic labour market, inflation may end up being higher and more persistent.
Economic growth in Singapore is expected to moderate further in 2023 in tandem with the slowdown in its major trading partners.
- Ravi further said the extent of the growth moderation will depend in part on how the scenarios for the global economy will pan out. As of now, he expects neither a recession nor stagflation in Singapore next year. But there are considerable downside risks in the global economy which bear close watching.
Singapore’s multi-pronged approach to inflation is with monetary policy to directly dampen inflation, fiscal support to help vulnerable groups cope with inflation and sound labour market adjustments to prevent inflation from becoming entrenched
On the monetary policy directly dampen inflation, Singapore’s monetary policy is centred on managing the exchange rate of the Singapore Dollar.
- When inflationary pressures build-up, he said MAS allows the trade-weighted exchange rate to appreciate faster. A stronger exchange rate helps to directly reduce imported inflation as well as restrain export demand, providing relief to labour market pressures.
The authority has been proactive in tightening monetary policy in response to rising inflationary pressures, tightening policy four times in the last nine months.
- In October 2021, MAS slightly increased the rate of appreciation of the trade-weighted exchange rate policy band as a pre-emptive move when core inflation picked up from 0.7% in Q2 2021 to 1.1% in July-August 2021. MAS was among the earlier central banks in the world to begin normalising monetary policy. Then in January 2022, it added slightly to the rate of appreciation of the policy band in an off-cycle move to lean against gathering inflation momentum. This was before the outbreak of war between Russia and Ukraine.
- April, MAS re-centred upwards the exchange rate policy band and further increased its rate of appreciation. This was in view of a fresh impulse to inflation arising from shocks to global commodity prices and supply chains in the wake of the Russia-Ukraine war. And last week, in another off-cycle move, MAS again re-centred upwards the exchange rate policy band to lean against price pressures becoming more persistent.
The appreciation of the exchange rate to-date has begun to restrain inflation.
- The trade-weighted exchange rate has appreciated by close to 4% compared with the beginning of October last year, acting as a filter against rising import prices.
- Domestic consumer prices have not risen by the same extent as that in the major advanced economies or global commodity prices.
- Year-to-date, the US and Eurozone have seen inflation rising to record highs of 8.2% and 6.8% respectively.
- Singapore’s headline inflation has been 5.0% year-to-date.
The effects of MAS’ four monetary policy tightening moves are still working their way through the economy and will continue to dampen inflation over the next 12 months.
- The appreciation of the exchange rate is estimated to dampen core inflation by 0.9% points in H2 2022.
- Over 2022-23, the four tightening moves to-date is estimated to restrain core inflation by an average of 1.2% points each year.
