Singapore’s central bank, the Monetary Authority of Singapore (MAS), is anticipated to maintain its current monetary policy stance in its upcoming review, despite persistent inflationary pressures and ongoing global uncertainties. While inflation in the city-state has moderated from its peak levels, analysts believe the MAS will hold off on easing its policy settings in light of recent geopolitical tensions, particularly in the Middle East, and the associated volatility in global oil and food prices.
Inflation Trends in Singapore
Inflation has been a major concern for Singapore in recent years. The Consumer Price Index (CPI) saw a peak in early 2023, reaching 5.5% year-on-year, driven by a confluence of factors including supply chain disruptions, higher energy prices, and surging food costs. However, inflation has since cooled, with the rate dropping to 2.7% in August 2024. Despite this decline, inflation remains above the pre-pandemic levels, contributing to ongoing uncertainty around Singapore’s economic outlook.
The MAS has forecasted that core inflation, which excludes the cost of accommodation and private transport, will ease further towards the end of 2024. The central bank projects core inflation to settle between 2.5% and 3.5% for the year, reflecting a more stable price environment. However, analysts remain cautious, citing potential risks from external factors, such as elevated oil prices and volatile food costs caused by climate change and geopolitical instability.
Economic Growth Outlook
Singapore’s growth trajectory has also shown signs of slowing. In 2023, the economy expanded by just 1.1%, a sharp decline from the robust 3.8% growth recorded in 2022. The slower pace of expansion is attributed to weaker global demand, higher inflation, and the lingering effects of the COVID-19 pandemic, which continues to impact certain sectors, particularly tourism and hospitality.
Despite these challenges, Singapore’s economy surprised on the upside in the second quarter of 2024, posting a stronger-than-expected GDP growth rate of 2.9% year-on-year. This prompted the Ministry of Trade and Industry (MTI) to revise its GDP growth forecast for 2024, raising it to a range of 2.0% to 3.0%, from the previous estimate of 1.0% to 3.0%.
According to economists, Singapore’s relatively open economy and its role as a major financial hub make it highly sensitive to global economic conditions. This makes the nation a bellwether for global growth trends. The recent geopolitical tensions, particularly in the Middle East, have led to a surge in oil prices, which in turn affects the cost of goods and services in Singapore, given its reliance on imported energy.
Analysts’ Views on Monetary Policy
In a recent poll conducted by Reuters, nine out of ten analysts expected the MAS to keep its monetary policy unchanged in its upcoming review. Most economists believe that Singapore’s current policy stance is appropriate given the external uncertainties and lingering inflation risks. “Oil prices have climbed from recent geopolitical tensions in the Middle East, while extreme weather conditions are still holding sway over food prices,” said Moody’s Analytics economist Denise Cheok. She added that the MAS is likely to remain cautious and will probably not ease its monetary policy until next year.
The MAS uses the Singapore dollar nominal effective exchange rate (S$NEER) as its main monetary policy tool, allowing the currency to fluctuate within a predetermined band against a basket of currencies from Singapore’s key trading partners. The MAS can adjust its policy through three levers: the slope, the mid-point, and the width of the S$NEER band. In contrast to many other central banks, which manage monetary policy by adjusting interest rates, Singapore’s central bank focuses on managing its currency to maintain price stability and support economic growth.
Denise Cheok noted that the MAS could reduce the slope of the S$NEER policy band in the first half of 2025, especially if imported inflation continues to decline. However, she added that a more significant move, such as adjusting the mid-point of the band, is unlikely until the second half of 2025.
Easing Likely in 2025
While most analysts expect the MAS to maintain its current policy stance, one outlier in the Reuters poll, United Overseas Bank (UOB), predicted a slight easing of the S$NEER slope in the upcoming review. UOB’s analysts cited the ongoing monetary easing trends in major advanced economies, such as the United States and the Eurozone, as well as the expectation that the global economy is entering the “last mile of disinflation.” UOB also noted that the MAS may delay any further policy normalization until early 2025.
Several central banks around the world have already begun cutting interest rates in response to weakening economic conditions. In September 2024, the U.S. Federal Reserve implemented a larger-than-expected 50-basis-point rate cut, while the European Central Bank is expected to follow suit with its third rate cut of the year. These moves have contributed to a decline in Singapore’s domestic borrowing costs, as evidenced by the falling Singapore Overnight Rate Average (SORA), which has decreased in tandem with U.S. rate cuts. Some economists argue that the lower SORA rate represents a form of de facto monetary easing in Singapore, even without formal action by the MAS.
Monetary Policy Outlook for 2025
Looking ahead, economists expect the MAS to begin easing its policy more decisively in 2025, provided that inflation continues to trend lower and global growth stabilizes. Fitch Solutions’ risk analyst Lee Yen Nee commented that Singapore’s economy is currently operating close to its potential, meaning that the MAS is unlikely to adjust its policy in the near term. “The economy has been performing at close to its potential, which suggests that there is no hurry for the MAS to adjust its policy,” she said.
However, if inflationary pressures subside further, particularly in areas such as food and energy, the MAS may have more room to loosen its policy to support growth. The central bank last adjusted its policy in October 2022, when it implemented its fifth consecutive tightening move. At that time, core inflation had peaked at 5.4%, while headline inflation reached a high of 7.3% in the third quarter of 2022.
Geopolitical and Environmental Risks
Geopolitical tensions and extreme weather events remain key risks to Singapore’s inflation outlook. The conflict in the Middle East has already pushed global oil prices higher, which could lead to further inflationary pressures in Singapore, given its dependence on imported energy. Additionally, climate-related disruptions, such as droughts and floods, continue to affect global food supplies, keeping prices elevated.
Singapore has also been proactive in addressing climate risks through its Green Plan 2030, which includes initiatives aimed at reducing the city-state’s carbon footprint and transitioning to a more sustainable economy. While these measures are expected to contribute to long-term price stability, they may introduce short-term inflationary pressures as businesses and consumers adjust to new regulatory requirements and higher costs associated with sustainable practices.
Conclusion
As Singapore’s central bank prepares for its upcoming monetary policy review, analysts widely expect the MAS to maintain its current policy stance, balancing the need to manage inflation with the challenges posed by global economic uncertainty. While inflation has moderated from its recent highs, external risks such as geopolitical tensions and climate-related disruptions continue to pose challenges to the country’s economic outlook.
Looking ahead, most economists expect the MAS to begin easing its policy in 2025, provided that inflationary pressures subside and global growth conditions stabilize. In the meantime, Singapore’s unique approach to monetary policy, which focuses on managing the exchange rate rather than interest rates, will allow the central bank to continue navigating the complex landscape of global inflation and growth dynamics.
photo source: Google
By: Montel Kamau
Serrari Financial Analyst
10th October, 2024
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