SINGAPORE- Singapore’s central bank unexpectedly tightened its monetary policy on Thursday, delivering its first such move in three years, amid mounting cost pressures caused by supply constraints and a recovery in the global economy.
The city-state joins a group of economies globally that have begun to dial back heavy pandemic-era monetary stimulus, as the threat of inflation outweighs the growth risks posed by the coronavirus.
The central bank, which manages its policy through exchange rate settings, said it would raise slightly the slope of its currency policy band, from zero percent previously.
Irvin Seah, a senior economist at DBS, said the move was a result of growth and inflation emerging out of a recessionary situation.
“This is a recalibration to be in line with economic fundamentals and I don’t foresee any further tightening unless we see upside risk in growth and inflation,” he said.
Singapore, recovering from last year’s record recession brought on by the COVID-19 pandemic, is beginning to re-open its borders with 84 percent of its population fully vaccinated against the virus. The economy is expected to grow 6–7 percent this year.
Only two financial institutions, including DBS, had expected a tightening, with 11 others predicting the Monetary Authority of Singapore (MAS) would stay on hold, in a Reuters poll.
Instead of using interest rates, the MAS manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed band.
It adjusts its policy via three levers: the slope, mid-point and width of the policy band, known as the Nominal Effective Exchange Rate, or S$NEER.
The width of the band and the level at which it is centered will be unchanged, the MAS said.
“This appreciation path for the S$NEER policy band will ensure price stability over the medium term while recognizing the risks to the economic recovery,” the MAS said in its statement.
The central bank expects growth to return to near its potential next year, notwithstanding shocks like a resurgence in the virus or setback in economic reopening.
It said core inflation, the central bank’s favored price measure, is expected to rise to 1–2 percent next year, and nearly 2 percent in the medium-term.
It was the first tightening since October 2018. Most economists had expected the MAS to only begin normalizing policy in April 2022. – Reuters