Central bank maintains Singapore’s ongoing battle against inflation amidst uncertain growth forecast

SINGAPORE – Singapore’s central bank cautioned on Wednesday about the weak growth expected in the near term for one of Asia’s prominent financial hubs. It also stated that its efforts to combat rising prices were ongoing, even though it adjusted its 2023 headline inflation forecast.

In its annual review, the Monetary Authority of Singapore (MAS) stated that the country’s inflation rate would decrease significantly due to its strong monetary policy stance. However, it emphasized that it would not transition from a focus on controlling inflation to supporting growth.

The headline inflation rate declined to 4.7 percent in May, compared to the 5.4 percent recorded in the first quarter.

According to MAS Managing Director Ravi Menon, the new forecast for 2023 headline inflation is between 4.5 percent and 5.5 percent, lower than the previous estimate of 5.5 percent to 6.5 percent.

Menon also stated that core inflation is projected to be between 2.5 percent and 3 percent by the end of the year, revised from the initial forecast of 2.5 percent, due to rising travel-related expenses.

MAS is prepared to adjust its monetary policy, “especially if inflation were to accelerate again,” Menon stated. He added, “We are closely monitoring the evolving relationship between growth and inflation and remain vigilant of risks on both sides.”

In April, the central bank kept its monetary policy settings unchanged for the first time in two years, as Singapore’s economy contracted in the first quarter, leading to concerns of a recession.

Singapore Surprises by Maintaining Unchanged Monetary Policy amid Growing Risks

Economists were taken aback by this decision, as they had anticipated a sixth consecutive tightening round after two unplanned adjustments in 2022. MAS’ next scheduled policy review is in October.

Rather than using interest rates, MAS manages its policy by allowing the Singapore dollar to appreciate or depreciate against the currencies of its main trading partners.

In a report accompanying the annual review, MAS Chairman Tharman Shanmugaratnam stated that Singapore’s gross domestic product is expected to be in the middle of the previously projected range of 0.5 percent to 2.5 percent this year. This is a decrease from the 3.6 percent growth recorded in 2022, as Singapore is still vulnerable to global economic slowdown and geopolitical uncertainties.

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Economist Chua Hak Bin from Maybank emphasized that the central bank must not lose sight of its efforts to combat inflation. He stated, “The government has various fiscal options to support growth and can implement measures to mitigate the downturn, including a fiscal support package if a recession materializes.”

Menon mentioned that Singapore is well-positioned for a second increase in its goods and services tax in 2024 if inflation falls to 2.5 percent to 3 percent in the final quarter of this year. The sales tax is set to rise to 9 percent in January next year, after increasing from 7 percent to 8 percent at the start of 2023.

According to Menon, the central bank’s monetary policy tightening streak resulted in a net loss of S$30.8 billion ($22.81 billion) in the fiscal year 2022-2023.

($1 = 1.3500 Singapore dollars)

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