Monetary Authority of Singapore Implements Surprise Tightening

April 14, 2012

In Singapore, interest rate policy is subordinated to exchange rate guidance, and the stance is reviewed only twice a year in April and October.  The Singapore Dollar (SGD) trades in a prescribed band, whose width, center and slope are determined at these semi-annual meetings.  The overall direction of policy points to modest, gradual appreciation, which is akin to interest rate increases.  But elsewhere in Asia, such normalization had paused, and the Monetary Authority of Singapore last October had eased by flattening the slope of the SGD band, breaking a string of three tightenings in April 2010, October 2010, and April 2011.

Officials decided at this month’s latest review to reverse its action in October 2011.  The band has been inclined more steeply around the same center-point as before, and the width of the band was narrowed.  Economic growth of 9.9% annualized last quarter surpassed expectations, and a statement from officials today more importantly revises their forecast of inflation upward:

CPI-All Items inflation and MAS Core Inflation have come in stronger than expected since October 2011 and will remain elevated over the next few months, before easing over the remaining course of this year.  MAS is revising the forecast for MAS Core Inflation from 1.5-2% to 2.5-3% for 2012.  The forecast for CPI-All Items inflation in 2012 will also be raised from 2.5-3.5% to 3.5-4.5%.

Officials go on to explain that

The tail risks in the key industrialised economies have receded, but global growth is likely to remain below trend in the near term.  Against this backdrop, the Singapore economy is expected to grow at a modest pace in 2012.  Core inflationary pressures have persisted, but will likely ease in the latter half of the year….

MAS will therefore continue with the policy of a modest and gradual appreciation of the S$NEER policy band.  The slope will be increased slightly, and there will be no change to the level at which the band is centered.  MAS is also restoring a narrower policy band.  This policy stance will help anchor inflation expectations, ensure medium-term price stability, and keep growth on a sustainable path.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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