Singapore's Monetary Policy Outlook

By Xinghui Kok

SINGAPORE (Reuters) – Singapore's central bank is widely expected to keep monetary policy unchanged next week, avoiding easing settings amid inflation and growth uncertainties driven by geopolitical tensions.

Of the 10 analysts polled by Reuters, nine anticipate that the Monetary Authority of Singapore (MAS) will not alter its policy during the scheduled review next Monday.

"Oil prices have climbed due to recent geopolitical tensions in the Middle East, and extreme weather conditions continue to impact food prices, which remain above pre-pandemic levels," stated Moody’s Analytics economist Denise Cheok.

Cheok predicts a reduction in the slope of the S$NEER policy band in the first half of the year, with a potential adjustment of the mid-point in the second half of 2025, if imported inflation continues to decrease noticeably.

The MAS is likely to ease only next year. Inflation in Singapore is proving persistent; while it dropped from a peak of 5.5% in early 2023, it still stood at 2.7% year-on-year in August. The central bank forecasts that core inflation will ease further in the final quarter, estimating it to be between 2.5% and 3.5% for the year.

As an important indicator of global growth, Singapore's international trade significantly overshadows its domestic economy. Economic growth slowed to 1.1% in 2023 from 3.8% in 2022. However, GDP rose by 2.9% year-on-year in the second quarter of 2024, exceeding expectations and prompting economists to revise their forecasts upward.

In August, the trade ministry adjusted its GDP growth forecast for 2024 to a range of 2.0% to 3.0%, an increase from the previous range of 1.0% to 3.0%.

According to Lee Yen Nee, a risk analyst at Fitch Solutions unit BMI, the economy is performing close to its potential, indicating no urgency for MAS to adjust its policy.

Globally, central banks are starting to lower rates. The Federal Reserve recently implemented a larger-than-normal half-percentage-point reduction, and the European Central Bank is expected to cut rates again next week.

Maybank economists noted that the decline in the Singapore Overnight Rate Average (SORA) alongside U.S. rate cuts can be viewed as a de-facto easing.

Instead of adjusting interest rates, Singapore manages its monetary policy by allowing the local dollar to appreciate or depreciate against the currencies of its primary trading partners within an undisclosed band known as the Singapore dollar nominal effective exchange rate (S$NEER). The MAS adjusts its policy using three key levers: the slope, mid-point, and width of the policy band.

The only outlier among analysts anticipating a loosening of monetary policy next week is UOB bank, which cited easing measures from major central banks in advanced economies, suggesting that the world is in the "last mile of disinflation." UOB analysts expect a slight reduction in the S$NEER slope but note the possibility that policy normalization may be delayed until January or April 2025.

The MAS has not changed its policy since tightening in October 2022, marking the fifth consecutive tightening as broader concerns about economic growth have kept authorities from making adjustments. Core inflation peaked at 5.4% in the first quarter of 2023, while headline inflation reached 7.3% in the third quarter of 2022. This year, MAS has shifted to a quarterly policy announcement schedule instead of semiannual reviews.