SINGAPORE — In the latest salvo in its fight against inflation, Singapore’s central bank tightened monetary policy on Friday (October 14th), allowing the domestic dollar to appreciate to curb domestic cost pressures in a move likely to bolster the currency’s increasingly privileged status as it demonstrates resilience in the face of the rapidly appreciating US dollar.

The Monetary Authority of Singapore (MAS) said in a statement that it would raise the midpoint of the Singapore dollar’s policy range “to its current level”, a move less aggressive than some observers believe. were waiting there. Specifically, MAS refrained from adjusting the slope or width of the currency band, two closely watched policy tools he could have used.

The MAS uses exchange rates, managed against an undisclosed currency-weighted basket of Singapore’s major trading partners, as its main monetary policy tool to reduce import costs, the main contributor to the inflation in a city-state that imports almost everything it consumes, letting domestic interest rates follow those of the US Federal Reserve.

“By not changing the slope of the strip, [the MAS] adopted the calibrated approach of not allowing the pace of currency appreciation to accelerate further. This is particularly due to the fact that the Singapore dollar is already one of the best performing currencies against the US dollar so far this year,” said Cheryl Chan, senior vice president of capital markets at the exchange. ADDX numeric values.

While the Singapore dollar has indeed weakened against the US dollar, depreciating around 5.7% against the greenback year-to-date through October 13, it has outperformed its peers. regional markets whose currencies have fallen in double digits over the same period and are trading at record highs. against major currencies like the Japanese yen, now at a 32-year low.

“Today’s decision consolidates the Singapore dollar’s gains against a basket of international currencies and therefore reinforces its status as a safe-haven currency in global capital markets. It will likely bolster Singapore’s value proposition as a important center of global and Asian wealth management,” ADDX’s Chan told Asia Times.

The Singapore dollar strengthened 0.7% to 1.4229 per US dollar after the MAS tightened. Among the reasons for the resilience of the local currency amid high inflation and economic uncertainty, analysts say Singapore enjoys a triple-A sovereign credit rating, a large current account surplus and a rich stock of foreign currency reserves.

The Singapore dollar is among the best performing currencies in Asia in 2022. Photo: Agencies

Wall Street banks such as Citigroup Inc and Goldman Sachs Group are reportedly bullish on the currency, with the latter naming the Singapore dollar “our favorite currency in non-Japanese Asia” in September amid bets it would rally against the note. green if MAS toughens policy this month, as it has.

But a stronger Singapore dollar can also be a double-edged sword. The appreciation of the local currency has raised concerns about the erosion of Singapore’s export competitiveness, particularly with weakening demand from China now putting downward pressure on Singapore’s manufacturing performance. city-state and fears that other major trading partners such as the United States are slowing down or heading into recession as they try to rein in inflation with rate hikes.

“An overly strong Singapore dollar could hurt exports and negatively impact economic growth at a time when the risk of a full-scale global recession cannot be ruled out,” Chan added. “This comes at a time when the global economy is potentially facing a hard landing in light of factors such as the slowdown in China and Western central banks aggressively raising interest rates.”

The MAS, in its semi-annual policy statement, said the global economy would face high inflation and weaker growth in 2023, noting that Singapore’s economic growth “will be below trend” the next year, which leads it to assess that, “Overall, further monetary policy tightening is needed to help ease price pressures over the coming quarters.

Friday’s adjustment is the fifth time Singapore’s monetary policy has been adjusted in the past year and comes as underlying consumer inflation in the city-state hit a nearly 14-year high in August – up 5.1% year-on-year, compared to 4.8% previously. in the previous month – driven by strong increases in service and food prices, which rose 3.8% and 6.1% respectively.

The MAS said it expects core inflation to “stay around 5%” for the rest of the year and into early 2023. The headline consumer price index August CPI, or headline inflation, came in at 7.5% year on year, rising above 7% in July. For 2022 as a whole, the central bank expects core inflation to average around 4%, while headline inflation is expected to average around 6%.

Singapore’s central bank expects inflation to “not abate more significantly until the second half of 2023.” His monetary policy decision was accompanied by advance estimates showing better-than-expected third-quarter growth with 4.4% year-on-year expansion, or 1.5% growth on a seasonally-adjusted quarterly basis. , compared to 0.2% previously. contraction in the second trimester.

“A further easing of Covid measures was the fundamental reason for the rebound. Tourist arrivals are now close to pre-Covid levels. Strong pent-up domestic demand is still the icing on the cake,” Irvin Seah and Philip Wee, senior economists at DBS Group Research, said in a note, referring to pandemic-related restrictions that have since been eased almost entirely. At the beginning of April.

Singapore’s usually bustling business district was nearly deserted on April 7, 2021, Covid restrictions have since been lifted. Photo: AFP / Roslan Rahman

Manufacturing output contracted and financial services posted a weaker third quarter from April-June, reflecting the Singapore government’s move to lower its 2022 gross domestic product (GDP) forecast in August. between 3-4% versus 3-5%, citing a weaker external demand outlook and significant downside risks to the global economy.

DBS’s Seah and Wee said third-quarter growth momentum implied “very modest upside risk” to their full-year GDP growth estimate of 3.5%. “However, the external headwinds are definitely picking up. Tighter monetary conditions, high inflation and geopolitical tensions will put even more pressure on global economic growth momentum in the coming quarter,” they said.

The pair said the Singapore dollar rate is at “a sweet spot for market participants,” but warned that “exchange rate appreciation alone cannot be the panacea.” To avoid a “destabilizing wage and price spiral”, Seah and Wee said the Singapore government would encourage employers and workers to “stimulate skills upgrading and increase productivity to keep the country competitive”.

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