As Singapore’s economy recovered from the global financial crisis and powered ahead in 2010, the Monetary Authority of Singapore’s aim was clear. With inflationary pressures increasing, the central bank allowed the Singapore dollar to climb, moving the exchange rate policy band uphill and inclining its slope in April.
Fast forward to the present and its direction has become less definite. The inflation threat is still present, as oil and other commodity prices increase, but the threat of instability, driven partly from the massive disaster in Japan, has also become apparent.
Most private sector economists view inflation as the greater threat and are anticipating that the MAS will reveal another round of monetary tightening policies. Increasing food, oil and other commodity prices and wages are oft-cited reasons behind this view.
“The fight against inflation is not yet won and more needs to be done,” said a DBS economist, adding that since the MAS meets bi-annually, its policy must be pre-emptive.
“MAS will have to wait till October for the next meeting if it fails to address the inflation problem now,” they noted.
DBS, along with other banks such as UOB, OCBC and Citibank, form the major camp which is forecasting an upward shift in the exchange rate policy band. Meanwhile, CIMB and Barclays are among the few which believe the central bank will steepen the band instead.
Kit Wei Zheng, a Citibank economist, explained why he believed a re-centering of the band is more probable. He believed that the current slope of the band at three percent per annum is already steep. He remarked, “Further steepening would only attract more capital inflows and depress short term interest rates further.”
MAS’ hawkishness so far, together with expectations of monetary tightening measures, has driven the Singapore dollar’s rise. The currency has been registering new highs against the US dollar, reaching S$1.2556.
The stressed greenback, weighed down by political and fiscal problems in the US, has contributed to the trend. In the past 12 months, the Singapore dollar has appreciated by over nine percent against it.
However, some economists believe that the threat of inflation can be alleviated without any amendment to the monetary policy. After all, the Singapore dollar is already on an appreciating path, set by MAS in April and October 2010.
Lim Hng Kiang, Minister of Trade and Industry, also said that the full-year headline consumer price index (CPI) inflation is expected to stay within the current estimates of three to four percent, assuming there will be no further oil price hike.
For Alvin Liew, a Standard Chartered economist, global uncertainties are not to be dismissed.
“Even as the situation has stabilised in Japan, there are potential supply chain disruptions which could affect Singapore’s manufacturing sectors,” said Mr. Liew.
“In addition, external uncertainties are ongoing, including sovereign debt concerns in Europe, developments in the MENA (Middle East and Northern Africa) region and radiation leaks in Japan.”
Mr. Lim noted that so far, the condition in Japan is not expected to have a major impact on Singapore’s supply chain.
“Much will depend on how prolonged the disruption to industrial activities in Japan will be.”