• Published on 12 April 2024
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MAS maintains unchanged S$NEER policy band parameters

Monetary Authority of Singapore (MAS) will keep the Singapore dollar nominal effective exchange rate (S$NEER) policy band unchanged, with no adjustments to its width or centering level.

In the January 2024 Monetary Policy Statement (MPS), MAS maintained the rate of appreciation of the S$NEER policy band, with no change to the width of the band or level at which it was centred. Since then, the S$NEER has continued to strengthen in the upper half of the appreciating policy band.

Global economic growth remained resilient at the turn of the year. In the near term, growth in Singapore’s major trading partners is expected to be tempered by the impact of past monetary policy tightening and withdrawal of previous expansionary fiscal policies. Towards the later part of 2024, final demand should pick up in line with the anticipated easing of global monetary policy. Global manufacturing should also remain on its recovery path. This outlook is subject to uncertainties, including around the pace and timing of monetary policy easing and the intensity of ongoing geopolitical conflicts.

MTI’s Advance Estimates show that growth in the Singapore economy came in at 0.1% on a quarter-on-quarter seasonally-adjusted basis in the first quarter of 2024, down from 1.2% in Q4 2023. Manufacturing and modern services activity saw some slowing in Q1 2024 after having expanded strongly in the preceding quarters. Growth in the consumer-facing sectors picked up in Q1, reflecting in part the boost from an increase in tourist arrivals.

Prospects for the Singapore economy should improve over the course of 2024, with GDP growth forecast to come in between 1–3%. The recovery in the manufacturing and financial sectors should resume, supported by the upturn in the electronics cycle and anticipated easing in global interest rates. Meanwhile, growth in the domestic-oriented sectors is projected to normalise, slowing towards pre-pandemic rates.

MAS core inflation averaged 3.4% y-o-y in Jan–Feb. The increase from 3.3% in Q4 2023 was lower than expected. Inflation edged up due to the step-up in the GST rate, higher electricity and gas tariffs from the carbon tax hike, as well as increases in essential services fees amid higher input and labour costs. However, inflation for food and travel-related services slowed and was more modest than anticipated. Both non-cooked food and food services inflation declined in Jan–Feb, while hotel room rates abroad also fell sharply after surging late last year. Excluding the impact of the GST increases, underlying inflation is estimated to have been unchanged in Jan–Feb from Q4 last year.

Meanwhile, CPI-All Items inflation fell to 3.1% y-o-y over Jan–Feb, from 4.0% in the preceding quarter, underpinned by the further reduction in private transport and accommodation inflation. The slower pace of increase in car prices and residential property rents was due to a greater supply of COE quotas and completed housing units, respectively.

Core inflation is forecast to stay elevated in the immediate quarters ahead, before stepping down more discernibly in Q4 2024 and into 2025. In the near term, core inflation will remain around current levels as water prices rose in April while prices of certain services, such as education and healthcare, will continue to catch up to higher costs. Nevertheless, as imported and domestic cost pressures continue to abate, underlying inflation should moderate further. Although crude oil prices rose over the last three months, global prices of most food commodities as well as intermediate and final goods remain subdued. On the domestic front, wage growth has eased and should moderate this year as labour market tightness dissipates. Productivity is also expected to pick up. Consequently, unit labour costs will increase at a significantly slower pace compared to the preceding two years.

For 2024 as a whole, both MAS core inflation and CPI-All Items inflation are projected to come in at an average of 2.5–3.5%. Excluding the impact of the increases in the GST rate, core and headline inflation are forecast at 1.5–2.5%.

Both upside and downside risks to the inflation outlook remain. Shocks to global food and energy prices, or stronger-than-expected demand for labour in the domestic economy, could bring about additional inflationary pressures. However, an unexpected weakening in the global economy could induce a faster easing of cost and price pressures.

The Singapore economy is expected to strengthen over 2024, with growth becoming more broad-based. The slightly negative output gap is projected to narrow further in H2 2024, even as underlying inflationary pressures gradually dissipate. MAS core inflation is likely to remain elevated in the earlier part of the year but should stay on its broadly moderating path and step down in Q4, before falling further into 2025.

Accordingly, current monetary policy settings remain appropriate. The prevailing rate of appreciation of the policy band is needed to keep a restraining effect on imported inflation as well as domestic cost pressures, and is sufficient to ensure medium-term price stability.

MAS will therefore maintain the prevailing rate of appreciation of the S$NEER policy band. There will be no change to its width and the level at which it is centred. MAS will closely monitor global and domestic economic developments, and remain vigilant to risks to inflation and growth.

Re-disseminated by The Asian Banker