A rise in inflation levels has pushed the Monetary Authority of Singapore (MAS) to tighten its monetary policy settings in an out-of-cycle move.

What this means is that the rate of appreciation of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band has been raised slightly, the central bank announced on Jan 25.

It added that the width of the policy band and the level at which it is centred will be unchanged.

"This move builds on the pre-emptive shift to an appreciating stance in October 2021 and is appropriate for ensuring medium-term price stability," stressed the central bank, referring to its tightening move in late 2021.

MAS manages the city-state’s monetary policy through the exchange rate settings by letting the Singapore dollar rise or fall against a basket of currencies – mainly of its key trading partners – within an undisclosed band.

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The tightening comes a day after the announcement that Singapore’s headline inflation – the total inflation in the economy – hit 4% in December 2021. This marks the fastest pace of increase in the price gauge in nearly eight years.

Economists expect further tightening in the scheduled April meeting. Maybank economists believe MAS will re-centre the S$NEER band and possibly steepen the slope for a third time, given how the current pre-emptive move via the slope adjustment may not be enough to reduce imported inflation.

“Our view remains that inflation risks not only remain tilted to the upside but it is on account of these upside risks extending beyond the mid-year that we continue to expect a further tightening in monetary policy at the April meeting,” says JP Morgan.

Maybank economists now expect 2022 headline inflation to hit 3.6%, from their previous estimate of 2.6%. Core inflation, meanwhile, is seen to reach 2.7% versus their earlier forecast of 1.8%.

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“A 2% GST hike, if announced in Budget 2022, will pose upside risks to our inflation forecasts,” says Maybank.

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