Singapore central bank tightens monetary policy in surprise move

Singapore's central bank unexpectedly tightened monetary policy for the second consecutive time, surprising markets as it moved to counter rising inflation risks fueled by higher oil prices. The Monetary Authority of Singapore (MAS) announced on Friday that it will slightly increase the slope of the Singapore dollar's nominal effective exchange rate policy band, with no change to its width or the level at which it is centered. This marks the second tightening in as many quarters, following a similar move in October 2021.

The decision affects all sectors of Singapore's economy, as the MAS uses the exchange rate rather than interest rates to manage monetary policy. By allowing the Singapore dollar to appreciate, the central bank aims to dampen imported inflation, which has been exacerbated by surging global energy costs. The move is significant for consumers and businesses, as it could help moderate price increases for goods and services, but may also weigh on export competitiveness.

The MAS stated that the core inflation measure, which excludes accommodation and private road transport, is expected to rise to 2-3% in 2022, up from an earlier forecast of 1-2%. Headline inflation is projected at 2.5-3.5%, compared with the previous estimate of 1.5-2.5%. The tightening comes as the global economy faces supply chain disruptions and rising commodity prices, with oil prices recently hitting multi-year highs.

In its statement, the MAS noted that the recovery in Singapore's economy remains uneven, but that the risks to inflation have become more pronounced. The central bank warned that further tightening could be warranted if price pressures persist. Economists had largely expected the MAS to hold policy steady, making the decision a surprise. The next policy review is scheduled for April 2022, and analysts will watch for signs of whether the tightening cycle will continue.