The Monetary Authority of Singapore’s (MAS) current policy setting will keep the Singapore dollar nominal effective exchange rate (S$NEER) policy band on an appropriately restrictive posture to ensure that core inflation declines to 2% by early 2025, according to MAS chief economist Edward Robinson.
Speaking on the topics of inflation and monetary policy at the JP Morgan Asia Macro Conference on March 6, Robinson notes that the forecast is predicated on the absence of any significant exogenous shocks — the likes of which have been the cause of the current state of global inflation.
Singapore’s utilisation of the exchange rate as its monetary policy instrument has allowed the central bank to alter domestic monetary conditions independently of other major central banks, which have had “seemingly sluggish” responses to inflation pressures arising from the series of shocks to global demand, supply and international financial conditions beginning with the Covid-19 pandemic in 2020.
Thus far, he says MAS’ progressive tightening of monetary conditions has helped to “arrest the momentum” of price increases and facilitated a gradual decline in inflation by taking advantage of its policy regime’s ability to alter exchange rate expectations.
These efforts to restore price stability have seen core inflation peak, according to Robinson. MAS Core Inflation is expected to continue moderating over the course of this year, after coming in at 4.2% for 2023, slightly higher than 4.1% in 2022.
Global inflation surge
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The projection for Singapore is in line with global expectations of headline and core inflation returning to low levels. “We’re not all the way back to inflation targets, but closer than many expected us to be at this point, and without having endured a protracted recession,” he says, attributing the progress to both luck and the work of central banks in standing by their inflation targets.
Good fortune is credited given the fact that Robinson believes most central banks “missed the whites of the eyes” of inflation and were slow to react even as price increases picked up pace from 2021, adopting a “wait-and-see” approach for almost a year. Those that did begin to move in around mid-2021, did so slowly, he says.
“Perhaps, the notion of looking past transitory supply shocks had become entrenched, but it was more probable that the complexity of simultaneous demand and supply shifts had confounded central banks and other observers,” he adds.
However, Robinson acknowledges that it was difficult to anticipate the pickup in headline consumer price index (CPI) inflation rates between late-2020 to mid-2021, well before the Russian invasion of Ukraine, which substantially reflected three factors.
First, restoring global supply chains after the Covid-19 pandemic proved much more difficult than anticipated, exposing the vulnerability of entire industries to delays in reactivating plants and shipping. Central banks did not expect these disruptions to be so extensive or to last as long as they did, he says.
Second, the pandemic severely disrupted and created structural changes in labour markets around the world. As a result, traditional indicators of labour market tightness or looseness became less reliable.
Finally, the strength of consumer demand, in response to their improved financial positions, including from government stimulus measures. When pandemic restrictions were in place, demand for goods was strong, but swung towards services as restrictions were lifted, says Robinson.
MAS policy posture
It was in this context of macro developments that MAS sought to adjust its monetary policy stance in a timely manner as the conjuncture and outlook of the global economy evolved.
MAS tightened its monetary policy five consecutive times from October 2021 — “relatively early” in the inflation cycle, according to Robinson — before leaving its parameters unchanged in April 2023.
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In its latest monetary policy statement (MPS) in January, the central bank maintained the prevailing rate of appreciation of its S$NEER policy band, with no changes to the width of the band or level at which it was centred, following another unchanged band in the previous MPS in October 2023.
Overall, MAS tightened monetary policy in five consecutive moves from October 2021 to October 2022, including two off-cycle moves in January and July 2022 as well as three consecutive upward re-centrings of the policy band.
Explaining these policy settings, Robinson says that MAS withdrew some policy accommodation in October 2021 and again in January 2022 amid the steady post-pandemic economic recovery, as well as the early uptick in inflation.
“It was clear to us that the policy settings that had been in place during the worst of the COVID-19 crisis were no longer appropriate,” Robinson recalls. “We then followed up with further tightening moves over 1H2022, motivated by the quicker-than-expected acceleration in inflation in the wake of the Russia-Ukraine war.”
The economist notes that the key advantage of acting early and aggressively was that it allowed MAS to exploit the exchange rate’s role in filtering imported inflation. “Our econometric simulations show that imported inflation would have been almost 6% on average each year over the past two years, compared to about 2.5% under the actual policy path.”
Despite the global and domestic growth outlook deteriorating and becoming more uncertain over the second half of 2022, Robinson notes that MAS stayed the course in tightening its monetary policy stance amid continued rising import prices and the build-up of domestic cost pressures.
Strong Singdollar not a liability to growth
The substantial appreciation of the Singapore dollar over the past two years has played an important role in bringing Singapore’s demand and supply back into better balance, through expenditure reduction and switching effects.
However, the associated increase in the real effective exchange rate, or the S$REER, has raised some concerns about the impact on Singapore’s export competitiveness.
“While the Singapore economy registered a string of weak export readings from late-2022 into 2023, our empirical work suggests that these were driven mainly by lacklustre external demand, rather than by a loss of external competitiveness,” says Robinson.
He believes a weaker Singapore dollar would not have provided much of a boost to exports given tepid external demand, with the global electronics industry entering a cyclical downturn in 2023 on the back of a boom in 2022. “Overall, the downturn and recent nascent recovery in Singapore’s electronics exports has been broadly in line with other major electronics producers in the region.”
Robinson says that over the longer-term, the real exchange rate will reflect the strength and prospects for Singapore’s underlying economic fundamentals compared with those of trade partners and competitors.
According to him, Singapore’s economic competitiveness is anchored by many other factors besides the exchange rate or absolute cost comparisons. “The appreciation of the Singapore dollar is not necessarily a deterrent to investment nor a liability to growth,” says Robinson. “The quality of our human capital, infrastructure, connectivity, and institutions, among other factors, speak for themselves.”
He adds that Singapore’s tradable sectors have been able to adapt to higher costs through efficiency gains, and by shifting into industries that can command a higher premium or terms of trade in global markets. “These factors continue to place Singapore in a good position to benefit from shifts in global production and trade, as geopolitics evolve and supply chains reconfigure.”
