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MAS to keep prevailing rate of appreciation of S$NEER policy band

Felicia Tan
Felicia Tan • 4 min read
MAS to keep prevailing rate of appreciation of S$NEER policy band
In 2024, MAS core inflation and CPI-All items inflation – or headline inflation – is expected to come in at 2.5% to 3.5%. Photo: Albert Chua/The Edge Singapore
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The Monetary Authority of Singapore (MAS) says it will maintain the prevailing rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band. There will no change to the band’s width and the level at which it is centred, says the central bank in its Macroeconomic Review published on April 26.

According to MAS, the S$NEER has continued to strengthen in the upper half of the appreciating policy band after the rate of appreciation was also retained at the MAS monetary policy statement (MPS) in January this year.

MAS’s latest decision comes as the Singapore economy is expected to strengthen over 2024 with growth expected to become more broad-based. The slightly negative output gap is projected to narrow further in the second half of 2024, even though underlying inflationary pressures are expected to gradually fade off.

“MAS core inflation is likely to remain elevated in the earlier part of the year but should stay on its broadly moderating path and step down in 4Q2024, before falling further into 2025,” predicts MAS.

“In the near term, core inflation will remain around current levels as water prices rose in April while prices of certain services, such as education and healthcare, will continue to catch up to higher costs,” it adds. “Nevertheless, as imported and domestic cost pressures continue to abate, underlying inflation should moderate further. Although crude oil prices rose over the last three months, global prices of most food commodities as well as intermediate and final goods remain subdued.”

MAS core inflation averaged around 3.4% y-o-y in January to February, marking a lower-than-expected increase from the 3.3% reading in the 4Q2023. The slightly higher number was due to higher GST, as well as electricity & gas tariffs from the carbon tax hike and increases in essential services fees amid higher input and labour costs. This was offset by slower inflation in food and travel-related services, which were more modest than anticipated. Both non-cooked food and food services inflation declined in Jan–Feb, while hotel room rates abroad also fell sharply after surging late last year.

See also: Singapore economy expected to grow by 2.7% y-o-y in 2Q2024

Excluding the impact of the GST increases, underlying inflation stood unchanged in January to February from 4Q2023.

In 2024, MAS core inflation and CPI-All items inflation – or headline inflation – is expected to come in at 2.5% to 3.5%.

“Both upside and downside risks to the inflation outlook remain. Shocks to global food and energy prices, or stronger-than-expected demand for labour in the domestic economy, could bring about additional inflationary pressures. However, an unexpected weakening in the global economy could induce a faster easing of cost and price pressures,” says MAS.

See also: MBS operator Las Vegas Sands plans entertainment-focused expansion in Singapore

Singapore’s GDP is also expected to strengthen to around its “potential rate” for the whole of 2024 as the negative output gap closes by the end of the year. The government is expecting GDP to grow between 1% to 3% for the year bolstered by the recovery in the manufacturing and financial sectors as well as the upturn in the electronics cycle and anticipated easing in global interest rates. Meanwhile, growth in the domestic-oriented sectors is projected to normalise, slowing towards their pre-pandemic levels.

Across the world, the global economy has showed “considerable strength” amid multi-decade high interest rates.

“This resilience, especially in the US, is set to continue for the rest of the year,” says MAS. However, the impact of previous tightening of policies and less supportive fiscal policies in most economies will continue to restrain growth.

Meanwhile the pace of disinflation, especially in the advanced economies (AEs), is likely to be uneven amid higher energy prices, persistent services inflation and some uptick in goods inflation, it adds.

“Hence, the balance of risks still appears to be tilted towards persistent inflation, although a delayed and slower pace of AE monetary easing could trigger latent financial vulnerabilities and consequently weigh on growth,” the central bank continues.

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