SINGAPORE: The Monetary Authority of Singapore MAS is expected to tighten monetary policy next month to strengthen the Singapore dollar and counter rising inflation, according to analysts.
The headline consumer price index, or overall inflation, increased to 7.5 per cent in August, as Singapore s core inflation rose to 5.1 per cent, in August, reaching a 14 year high, official data showed on Friday.
The MAS usually adjusts monetary policy twice a year, in April and October. In April and July MAS tightened policy thrice, once in April and twice in impromptu announcements in January and July.
The stage may be set for another tightening as inflation is expected to keep rising, said Selena Ling, OCBC Bank chief economist and head of treasury research and strategy.
MUFG Bank senior currency analyst Jeff Ng said that inflation would continue to rise due to a combination of supply and demand-side factors. Food inflation, which hit 6.4 per cent in August, is likely to remain high, due to the cost of meat and fish in particular. He said core inflation components are likely to face high input costs.
MUFG Bank has raised its headline inflation forecast to 6.3 per cent from 5.5 per cent in 2022 and core inflation forecast to 4.2 per cent from 3.5 per cent OCBC Bank's projections of 5.9 per cent for headline inflation and 4.2 per cent for core inflation remain the same, Ms Ling said. She said that recent developments such as the Russia-Ukraine war escalation and rice export ban by India imply that there are more upside external price risks in addition to domestic wage pressures.
Maybank raised its forecasts slightly, to 4.2 per cent for core inflation from 4 per cent and 6.2 per cent for headline inflation from 6 per cent. This is due to the larger than expected pickup in food and services costs, said Maybank analysts Chua Hak Bin and Lee Ju Ye.
The monetary policy adopted by MAS has an effect on the strength of the Singapore dollar.
MAS uses the exchange rate as its main policy tool, unlike most central banks that manage monetary policy through the interest rate. It lets the exchange rate float within an unspecified policy band, and changes the slope, width and centre of the band when it wants to change the pace of appreciation or depreciation of the Singapore dollar.
As it has done before, analysts said that MAS is highly likely to re-centrate the Singapore dollar nominal effective exchange rate S NEER to the prevailing level. Maybank's analysts said that the S NEER is currently trading at about 1.5 per cent above the implied mid-point.
Mr Ng said the Singapore dollar is expected to surpass other regional currencies like the Philippine peso, Thai baht and Indian rupee.
The Singapore dollar is growing in strength and trading at record levels against several currencies like the Japanese yen. This has gone up to more than 100 yen.
Japan intervened in the foreign exchange market on Thursday to buy yen for the first time since 1998, in an attempt to shore up the battered currency after the Bank of Japan BOJ stuck with ultra-low interest rates.
The United Kingdom has been fighting the highest inflation it has seen in 40 years, as the local currency has been strengthening against the pound.
One pound could get above S $1.80 at the beginning of the year. On Friday, that figure was S $1.58.