14 April 2022
1. In the January 2022 Monetary Policy Statement (MPS), MAS increased slightly the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band. There was no change to the width of the policy band or the level at which it was centred. This off-cycle move was assessed to be necessary in view of the upward revision to the MAS Core Inflation forecast amid rapidly accumulating external and domestic cost pressures.
S$ Nominal Effective Exchange Rate (S$NEER)
2. Over the last three months, the S$NEER has fluctuated within the upper half of the policy band. It depreciated during periods of US$ strength as geopolitical tensions intensified but appreciated when sentiment around global and domestic economic prospects improved. Since mid-October 2021, the S$NEER has strengthened by 0.97% and is currently close to the top of the policy band. The three-month S$ Singapore Interbank Offered Rate (SIBOR) rose to 0.8% in March while the three-month compounded Singapore Overnight Rate Average (SORA) edged up slightly to 0.3%.
3. The war in Ukraine has driven global inflation forecasts higher and dented the outlook for growth. While the global economy is expected to continue on its recovery path in 2022, it will do so at a more moderate pace than earlier projected. The Singapore economy should record a second consecutive year of above-trend growth, which will bring output to a level slightly above potential. With the labour market remaining tight and higher global inflation passing through to domestic costs, core inflation will see a broad-based step up in 2022 and risks remaining elevated over the medium term.
Growth Backdrop and Outlook
4. The Advance Estimates released by the Ministry of Trade and Industry today indicated that the Singapore economy grew by 0.4% on a quarter-on-quarter seasonally-adjusted basis in Q1 2022, compared with the 2.3% expansion in Q4 2021. The slowdown was largely anticipated and driven by weaker activity in the manufacturing and modern services sectors, which had posted strong outturns in the preceding quarter. In the manufacturing sector, output in the pharmaceutical and marine & offshore engineering industries contracted in January–February from their levels in Q4 last year. In contrast, domestic-oriented activities generally expanded alongside the relaxation of restrictions on gatherings and the proportion of workers permitted to work from office.
5. Global GDP growth was strong in early 2022, led by robust manufacturing activity, especially in Asia, and firm domestic consumption in some advanced economies. At the same time, supply-side bottlenecks mostly persisted, causing global inflation to rise to multi-year highs.
6. Since then, the geopolitical crisis, fresh supply disruptions and the surge in global prices of food, energy and industrial commodities have weakened consumer and business confidence. Overall prospects for the global economy are uncertain and hinge on the evolution of the conflict and regional pandemic situation. Nevertheless, at this juncture, aggregate demand growth in Singapore’s major trading partners is expected to ease somewhat but not be derailed given the buffer provided by savings and wealth accumulated in recent years.
7. Against this backdrop, Singapore’s trade-related and modern services sectors should expand more slowly this year compared to 2021. However, the recovery in the domestic-oriented and travel-related sectors will gather pace with the latest easing of safe management measures and border restrictions. Domestic demand, particularly private consumption as well as public infrastructure investment, would be the main source of growth in 2022.
8. In the absence of further disruptions caused by the Ukraine war or a severe setback in the trajectory of the pandemic, Singapore’s GDP growth is expected to come in at 3–5% this year. The economy’s negative output gap is estimated to have closed at end-2021 and should turn modestly positive in 2022.
Inflation Trends and Outlook
9. MAS Core Inflation, which excludes the costs of accommodation and private transport, increased to 2.3% year-on-year in January–February 2022, from 1.7% in Q4 2021. This mainly reflected rising electricity & gas and non-cooked food inflation, driven by higher global oil and food prices at the turn of the year. Inflation for discretionary goods and services also stepped up, as household spending firmed and businesses passed on cost increases to consumers. Meanwhile, accommodation costs rose at a faster pace on a year-on-year basis in January–February, causing CPI-All Items inflation to rise to 4.2% from 3.7% in Q4 last year.
10. In the quarters ahead, consumer price inflation in Singapore will increase by more than previously anticipated. Sharply higher global commodity prices since late February and renewed supply chain disruptions brought about by both the Ukraine war and the pandemic will exacerbate pre-existing inflationary pressures. The latest surge in energy and agricultural commodity prices will raise domestic inflation for electricity & gas, fuel and non-cooked food over the year. In turn, these will feed into higher transportation and food services costs.
11. Strong pent-up demand for discretionary expenditure could also lead to greater pass-through of accumulating business costs. The resident unemployment rate has declined to its pre-crisis level and is expected to remain low. While incoming non-resident workers would alleviate manpower shortages, the overall labour market will remain tight and keep resident wages well supported. The resulting unit labour cost increases will be a key source of underlying inflation.
12. All in, MAS Core Inflation is forecast to pick up sharply in the coming months. It should then moderate in late 2022, reflecting in part some stabilisation of commodity prices and possible easing of supply constraints. However, global inflationary pressures and a tight domestic labour market could place continuing upward pressure on core inflation over the medium term. These are distinct from the one-off impact of the GST increases, which will be cushioned by targeted fiscal measures, and do not require a monetary policy response.
13. CPI-All Items inflation will increase by more than core inflation this year due largely to the step-up in private transport costs. This reflects higher COE premiums and petrol prices. Accommodation costs will also add to headline inflation as the backlog of delayed residential projects takes time to complete and catch up with firm demand.
14. MAS Core Inflation is now projected to come in at 2.5–3.5% this year, from the 2.0–3.0% expected in January. Meanwhile, CPI-All Items inflation is forecast at 4.5–5.5%, from the earlier range of 2.5–3.5%.
15. Barring major dislocations to the global economy, the Singapore economy should grow at an above-trend pace for the second consecutive year in 2022. The output gap will turn slightly positive, with aggregate GDP having fully recovered from the pandemic-induced decline.
16. The fresh shocks to global commodity prices and supply chains are adding to domestic cost pressures, and will bring MAS Core Inflation to a significantly higher level than its historical average through 2022. Underlying inflationary pressures remain a risk over the medium term.
17. MAS has therefore decided to further tighten monetary policy, in two ways. First, MAS will re-centre the mid-point of the exchange rate policy band at the prevailing level of the S$NEER. Second, MAS will increase slightly the rate of appreciation of the policy band to exert a continuing dampening effect on inflation. There will be no change to the width of the policy band.
18. This tighter monetary policy stance, which builds on the policy moves in October 2021 and January 2022, will slow the inflation momentum and help ensure medium-term price stability. MAS will remain vigilant to developments in the external environment and their impact on the Singapore economy.
Past Monetary Policy Decisions