The Monetary Authority of Singapore (MAS), in an unexpected and rare inter-meeting move, tightened FX policy ahead of the regular semi-annual review in April. MAS raised slightly the rate of appreciation of the SGD NEER policy band while keeping the width and mid-point of the band unchanged.
SGD NEER has been trading close to the upper bound of the policy band
Source: Bank of Singapore, Bloomberg.
We assume the slope of the SGD NEER band has been raised to 1-1.5% per annum from 0.5% previously. The timing is a surprise, but the direction of the move is not. The MAS had been one of the earlier central banks in Asia to normalise monetary policy. The policy statement characterised today’s decision as another pre-emptive move that “builds upon” the October 2021 tightening move. The MAS willingness to tighten earlier also reflects the authorities’ optimism in the resiliency of economic expansion in the face of a perceived transitory Omicron drag.
The increase in the slope of the SGD NEER band followed the MAS's assessment that the outlook for inflation has shifted higher since the Monetary Policy Statement in October 2021, as elevated imported inflation from higher commodity prices and supply chain bottlenecks acted in concert with a tighter domestic labour market. Following the rise in December core CPI, the MAS revised up its 2022 core CPI range to 2.0-3.0% from the prior 1-2% that was expected in October.
Tighter FX policy to lean against rising inflation pressures in Singapore
Source: Bank of Singapore, Bloomberg.
In terms of the contours of the CPI forecast, MAS expects core inflation could reach 3% (from 2.1% in December) by mid-2022 before moderating. Upside risks to inflation could also come from GST hikes which may start this year. The government said it will provide details on a proposed GST hike at the upcoming FY2022 Budget announcement on 18 February.
We see further steepening of the SGD NEER slope at the April review, as part of policy normalisation to take the SGD NEER appreciation slope closer to the historical 2%-2.5% appreciation per annum eventually. An abrupt re-centering of the mid-point is possible, to deal with more persistent upward inflation pressures but is currently not our base case.
We have been moderately positive on the SGD on expectations of further MAS policy tightening. A more hawkish MAS strengthens conviction on our year-end USDSGD forecast of 1.33 despite tailwinds for the USD from an increasingly hawkish Fed. Given that expectations of a GST hike later this year are now quite high, it is possible the SGD could weaken in a knee-jerk reaction if the government suggests a slight delay to give the public more time to prepare themselves.
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