Rising price pressures has pushed inflation to the forefront in many countries.
This follows the strong global economic recovery, supply-side bottlenecks and more recently, the Russia-Ukraine crisis. Collectively, these factors have driven global commodity prices up significantly, observes Irvin Seah, senior economist at DBS Bank.
He notes that elevated imported inflation levels will eventually spill over into Singapore’s dynamics.
“Juxtaposed with an already tight labour market and an increasingly positive output gap, domestic inflationary pressure will remain high throughout 2022,” mulls Seah.
He is expecting inflation to continue to hover around 4% in the coming months, before easing towards the end of the year. With this, the headline and core inflation metrics will average at 3.8% and 3.0% respectively in 2022, explains Seah.
This will come in tandem with a normalisation in the city-state’s growth rate to around 3.5% this year, from the 7.6% seen in 2021, says Seah.
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This is even as the republic sees a pick up in the business receipts from various industries. “Business expectation has peaked and broadly remained positive, with the exception of the real estate sector amid rising interest rate risk,” says Seah.
Demand for exports have also remained robust in January and February, despite a slowdown in NODX (non-oil domestic exports) to China. This is thanks to sales to the US and EU which “helped to pick up the slack,” notes Seah.
Against this backdrop, he is expecting a monetary policy tightening by the Monetary Authority of Singapore (MAS) in its upcoming half-yearly macroeconomic review that is anticipated on Apr 14.
“[This] should render USD/SGD resilient to a stronger USD index (DXY) barring shocks to the global economy,” says Seah, adding that a tighter Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy was what was adopted in 2018-2019.
With this, the economist has penciled a “meaningful rise” in the Singapore Overnight Rate Average (SORA) in the coming months, especially with the Fed looking to frontload monetary tightening amidst acute inflation pressures.
The SORA is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8am and 6.15pm.
Agreeing, Vishnu Varathan, who heads the economics & strategy division of Mizuho Bank is expecting a “double-barrelled” tightening response by the MAS, such that the S$NEER (and correspondingly the SGD) appreciates immediately after the policy move.
However, he cautions that “SGD outcomes beyond may have to defer to broader USD trend amid geopolitical risks, a hawkish Fed and downside risks to China’s growth”.
The upcoming move – the second for the year – comes after an off-cycle tightening in January in response to high inflation levels.
“The MAS had meant for January’s off-cycle tightening by ‘slightly’ increasing the S$NEER slope (to an estimated 1.0% per annum from the 0.5% per annum slope reinstated in October last year) to be a timely but restrained calibration that buys time to assess the evolving recovery amid mounting inflation risks more comprehensively,” Varathan elaborates.
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He adds that a double-barrelled move would comprise: a continuation of the calibrated steepening of the S$NEER slope (to 1.5% per annum) and crucially a re-centering of the S$NEER mid-point higher.
This would offer two advantages says Varathan. Firstly, it offers the ability to fine-tune the degree of front-loaded tightening “which may be especially important given that the current prevailing S$NEER (gauged from the 2-week average) appears exceptionally rich at +150 basis points,” he explains.
As such, the “higher but below” approach to re-centering will allow the central bank to temper and reclaim control over the extent of tightening.
This “higher but below” stance also gives a degree of uncertainty into the S$NEER parameters, thereby further diminishing risks of inadvertent and unwelcome speculative interest based on policy expectations, says Varathan.
Cover image: Samuel Issac Chua/The Edge Singapore
