14 October 2021
1. In its April 2021 Monetary Policy Statement, MAS kept the rate of appreciation of the S$NEER policy band at zero percent, with no change to the width of the policy band or the level at which it was centred. This policy stance was appropriate as core inflation was projected to rise only gradually from subdued levels and keep below its historical average.
S$ Nominal Effective Exchange Rate (S$NEER)
2. Over the last six months, the S$NEER broadly fluctuated within the upper half of the policy band, reflecting in part shifting sentiments around Singapore’s macroeconomic outlook as the pandemic evolved. On a point-to-point basis, the trade-weighted index weakened as the S$ depreciated against some of the regional currencies and the US$. The three-month S$ Singapore Interbank Offered Rate (SIBOR) was unchanged at 0.4%, while the three-month compounded S$ Singapore Overnight Rate Average (SORA) eased slightly to 0.1% in October.
3. Despite near-term uncertainties, the global economy should expand at an above-trend pace in the quarters ahead. In conjunction with a gradual domestic reopening, the Singapore economy should also continue on its recovery path and aggregate output should return to potential in 2022. As the labour market slack is absorbed and with imported inflation forecast to remain firm, MAS Core Inflation is expected to rise steadily from below 1% on average this year to 1–2% in 2022.
Growth Backdrop and Outlook
4. The Advance Estimates released by the Ministry of Trade and Industry today indicated that the Singapore economy expanded by 0.8% on a quarter-on-quarter seasonally-adjusted basis in Q3 2021, following a 1.4% contraction in the second quarter. With the turnaround, aggregate output returned to its pre-pandemic level after its setback in Q2. The sequential pickup in Q3 was largely due to the modern services sector, where activity was underpinned by firm growth in the information & communications industry. Meanwhile, the domestic-oriented sectors remained weak, with many affected by the tighter measures imposed in response to the increase in COVID-19 infections. In the manufacturing sector, output in the electronics and precision engineering industries expanded in July–August compared to Q2, while other industry clusters contracted. On a year-ago basis, GDP rose by 6.5% in Q3, the third consecutive quarter of increase.
5. The pace of global economic expansion slowed over the past six months as widespread outbreaks of the Delta variant weighed on demand for consumer-facing services and caused disruptions that constrained the fulfilment of goods orders. However, global economic prospects remain broadly intact. As existing vaccines have been effective in limiting severe illness from the dominant COVID-19 variant, and as inoculation rates rise globally, consumption activity should pick up while supply constraints ease. Global growth is forecast to come in above trend for the second consecutive year in 2022, even as uncertainties remain, including around the course of the pandemic.
6. Strengthening external demand and recovering domestic expenditure are expected to sustain a firm pace of growth in the Singapore economy in the quarters ahead. Growth in the trade-related and modern services sectors will be supported by the resilient electronics cycle and improving business activity. Some improvement in conditions in the domestic-oriented and travel-related clusters is also expected as Singapore transitions in a progressive but calibrated manner towards managing COVID-19 as an endemic norm.
7. GDP growth in the Singapore economy is expected to come in at 6–7% this year and register a slower but still-above trend pace in 2022. Barring the materialisation of tail risks such as the emergence of a vaccine-resistant virus strain or severe global economic stresses, the Singapore economy should remain broadly on an expansion path. The slack in the labour market should continue to be absorbed and the negative output gap close in 2022.
Inflation Trends and Outlook
8. MAS Core Inflation, which excludes the costs of accommodation and private transport, rose to 1.1% year-on-year in July–August, from 0.7% in Q2 this year. This mainly reflected the increase in global commodity prices in recent months, which passed through to electricity & gas tariffs and non-cooked food inflation. At the same time, higher wage costs have fed inflation in some domestic consumer items such as food & beverage services. CPI-All Items inflation rose by a smaller extent, to 2.5% from 2.3% over the same period, with the pickup in core inflation partly offset by lower private transport inflation.
9. In the quarters ahead, rising imported and labour costs, alongside the recovery in domestic activity, will support a broad-based pick-up in inflation. Imported inflationary pressures are likely to persist for some time amid strengthening global demand and lingering supply constraints. On the domestic front, wage growth is likely to be firm alongside the dissipation of labour market slack through next year. The accumulating business costs will pass through to consumer price inflation as the domestic economy reopens and private consumption recovers. Various service fee increases that were put on hold since the pandemic began, such as for transport, healthcare and education, could also resume.
10. Private transport inflation is likely to moderate next year against a slower pace of increase in COE premiums and petrol costs. However, accommodation inflation is expected to remain firm amid construction delays.
11. For 2021 as a whole, MAS Core Inflation will come in near the upper end of the 0–1% forecast range, and is expected to increase further to 1–2% in 2022. CPI-All Items inflation will come in around 2% in 2021 and average 1.5–2.5% next year.
12. Growth in the Singapore economy is likely to remain above trend in the quarters ahead. Barring a resurgence of the virus globally or a setback in the pace of economic reopening, output should return to around its potential in 2022.
13. At the same time, external and domestic cost pressures are accumulating, reflecting both normalising demand as well as tight supply conditions. MAS Core Inflation is expected to rise to 1–2% next year, and close to 2% in the medium term.
14. MAS will therefore raise slightly the slope of the S$NEER policy band, from zero percent previously. The width of the policy band and the level at which it is centred will be unchanged. This appreciation path for the S$NEER policy band will ensure price stability over the medium term while recognising the risks to the economic recovery.
Past Monetary Policy Decisions