WHY THE SURPRISE MOVE?
Rising inflation is the primary reason for the central bank’s earlier-than-expected move, said economists.
MAS said Singapore’s core inflation – a key policy consideration for the central bank – is expected to rise to 1 to 2 per cent next year, and come close to 2 per cent in the medium run.
DBS senior forex strategist Philip Wee described the MAS’ policy shift as “a timely response” to pre-empt global inflationary pressures, which have been on the rise amid supply chain disruptions and surging energy prices.
Mizuho Bank’s head of economics and strategy Vishnu Varathan said: “The MAS anticipates concurrent build-up in inflationary pressures as demand recovery conspires with capacity (and) supply-chain kinks and higher cost-push.”
There is also the potential for “extensive pass-through of prominent energy inflation”, while a tightening job market condition is reviving wage pressures.
“Finally, and perhaps most importantly, the long (six-month) lag between (policy) meetings raises the cost of normalisation signalling forgone,” said Mr Varathan.
“So, whilst recovery thus far has fallen short of levels, a backdrop of growing inflation risks in quarters ahead, alongside adequate recovery, incentivises (a) pre-emptive normalisation,” he added.
Calling the MAS “unexpectedly hawkish”, OCBC’s head of treasury research and strategy Selena Ling noted that apart from external factors, there were also “some policy-driven cost pressures” due to the recent expansion of the Progressive Wage Model to include more sectors and occupations.
“In addition, service fee hikes, including those in transport, education and healthcare, also are on the cards, but how much wage growth would also pick up in 2022 remains the crux for end-consumers which are likely to face higher prices for a large swathe of goods and services going ahead,” she said.
With Singapore being a small and open economy that is dependent on imports of goods and migrant workers, the “pass-through to end-consumers may be fairly immediate”.
As such, the steepening of the S$NEER slope “would help alleviate some of the broad US dollar strength and contain imported inflation for goods from regional economies”, Ms Ling added.
Agreeing, HL Bank’s senior treasury strategist Jeff Ng, said: “When monetary policy is tightened, it helps to lower the prices of imports for local consumers, which will help to moderate inflation. If you don’t tighten, then you are running the risk of allowing inflation to increase further.”
Meanwhile, market watchers like DBS senior rates strategist Eugene Loew pointed out that the MAS’ shift mirrors that of other central banks across the world.
“As we transition away from the pandemic crisis and reopen travel, monetary policy should also normalise and with focus tilt towards managing inflation risks,” he said.
Still, the earlier-than-expected policy tightening came amid uncertainties about growth – a reason why some economists expected the central bank to keep monetary policy unchanged.
Preliminary data released separately on Thursday morning showed that Singapore’s economy grew by 6.5 per cent year-on-year in the third quarter, slowing from the 15.2 per cent growth in the previous quarter.
The economic recovery “still has some way to go”, said economist Alex Holmes from research firm Capital Economics.
COVID-19-related weakness remained evident in the third quarter, he said, pointing to the 1.3 per cent quarter-on-quarter contraction for the wholesale and retail trade, and transportation and storage sectors.
“Consumer spending will have been hit once more by restrictions that were brought in again in late September, despite the country’s world-leading vaccination rate,” Mr Holmes added.
“The bumpy experience of learning to live with the virus so far shows that it is unlikely that social distancing measures will be lifted quickly and that they could be tightened again in future.”
While the recent expansion of vaccinated travel lane arrangements to 11 countries will help, “travel is likely to be slow to resume”. “As such, parts of the service sector are still set to remain well below their pre-pandemic levels of output throughout next year,” the economist wrote in a note.