Market Insights

What to Know About Singapore's inflation in 2022

SGD Inflation

Singapore's central bank announced a tightening of monetary policy, as slowing inflation began to take its toll on the city-state's economy. However, separate data released on Thursday showed Singapore's economic growth had started to weaken over the year's first quarter.

Key Points

Singapore's central bank tightened its monetary policy on Thursday, saying its decision would slow the acceleration of inflation and alleviate global supply problems, including the war in Ukraine and oil shortages.

The central bank raised its benchmark interest rate for the third time in the past six months, even as separate data showed the city-state's economy slowing in the first quarter.

The Singapore dollar jumped briefly after the Monetary Authority of Singapore (MAS) changed its exchange rate policy. The MAS shifted the mid-point of its exchange rate policy band, known as the Nominal Effective Exchange Rate, or S$NEER, to remain at the prevailing exchange level.

What Drove Monetary Authority of Singapore's Decision

It was the first time in twelve years that the MAS implemented this particular tightening method on its own. The MAS pushed the Singapore dollar to a higher exchange rate against the U.S. dollar, leading to higher prices. Earlier, the U.S. Federal Reserve had entered a more aggressive period of tightening monetary policy by raising interest rates.

The MAS kept the width of its exchange rate band unchanged. "The war in Ukraine has driven global inflation forecasts higher and dented the growth outlook," MAS said.

"The fresh shocks to global commodity prices and supply chains are adding to domestic cost pressures," it said, warning that inflation risks remain "elevated over the medium term."

Singapore, a major travel and business hub, eased its restrictions as the Covid-19 pandemic wound down late March and early April. The country removed its travel ban for most international travellers and also removed restrictions for new asset types and all local travellers.

Prospects of More Tightening

The MAS manages monetary policy by setting the exchange rate instead of interest rates because trade flows dwarf its economy. It adjusts its policy via three levers: the policy band's slope, midpoint, and width. The MAS manages monetary policy by setting the exchange rate instead of interest rates because trade flows dwarf its economy. It adjusts its policy via three levers: the policy band's slope, midpoint, and width.

"The door is definitely not closed yet," said Selena Ling, head of treasury research and strategy at OCBC, referring to another potential tightening in October. The Singapore dollar strengthened about 0.5 per cent after the central bank's statement, and it continued to rise to its highest point in a week.

The central bank maintained its forecast for gross domestic product to expand three per cent to five per cent this year; the economy grew 7.6 per cent in 2021, the fastest in a decade, after recovering from an economic contraction the previous year. The economy grew 3.4 per cent in January-March, slower than the last quarter but more than economists had predicted.

Separate advance GDP data released Thursday showed that GDP grew 3.4 per cent in January-March year-on-year, slower than the previous quarter but more than economists had predicted.

In January, the MAS tightened monetary policy despite being normally scheduled to hold rates steady. This followed a tightening in October, the second in one year. Meanwhile, many other global central banks, including the Fed, have tightened their own policies to fight increasing inflation.

Early Thursday, South Korea's central bank unexpectedly raised its interest rates to their highest level in almost five years. The Russia-Ukraine conflict's impact on consumers has intensified inflation and supply shortages caused by a coronavirus, which was spread among mammals by bats that may have originated as a zoonotic infection. Singapore's government has said it stands ready to respond with fiscal or monetary policies if the conflict affects growth and inflation.

MAS said it would remain vigilant to external developments impacting the Singapore economy. Specifically, core inflation is expected to increase by 2.5 to 3.5  per cent this year, up from its forecast of two to three per cent. Overall inflation is expected to be 4.5 to 5.5  per cent, up from the previous 2.5 to 3.5  per cent forecast.

"The MAS fully recognise that if inflation continues to surprise upside, there's a possibility they have to do more at future policy meetings," said Khoon Goh, head of Asia research, ANZ.

How Did MAS Tighten Its Monetary Policy?

The Monetary Authority of Singapore re-centred its policy band, raising the mid-point of it to a trading range of 1.3870 to 1.4200 and steepening the slope of appreciation in two significant ways: First, the central bank stopped intervening when the currency was above the mid-point of the new band, and second, it changed its policy on intervention to allow the currency to appreciate further than before when it was trading within the new band.

The MAS also raised its forecast for price gains and suggested that further tightening may soon be necessary. "Underlying inflationary pressures remain a risk over the medium term," the statement said. Officials from the central bank cited pent-up discretionary spending and demanded labour as a reason for an increase in wages. However, they hope that increased visibility into the reasons for this demand will allow them to adjust their policies before the shortages become even more severe. "We should be able to clear the shortages within the next few months," Finance Minister Lawrence Wong told Parliament in March.

Less than an hour after the Korean Ministry of Strategy and Finance announced its fourth quarter-point interest rate increase since August, the Bank of Korea announced that it would also raise its benchmark interest rate by that much, to four quarter-point increases since August. The decision surprised some economists, who believed that the Bank of Korea took a wait-and-see approach to monitor inflation. Rhee Chang-Yong, the incoming governor of the Bank of Korea, has made it clear that he believes inflation is a pressing concern and must be dealt with.

It's tempting to explain the recent hikes in interest rates as a couple more passengers join a hawkish train that has already been moving across the globe. This week, interest rates rose by half of a  percentage point in Canada, along with the Reserve Bank of New Zealand. In Australia, interest rates are also expected to rise. Japan also tried to calm speculation that it would soon raise interest rates, but some analysts don't believe them.

Friday's news confirms what Asia has seen: South Korea was also battling what it saw as a price bubble, and Singapore was dealing with these issues with its usual steady approach. Controlling inflation seems to have given them more concern than Covid or the risk of a sharp downturn stemming from an impossibly strong currency.

Singapore's Inflation Rate

Singapore's inflation rate accelerated in February, rising to 4.3 per cent from 4.0 per cent in the two previous months and above forecasts of 4.2 per cent. The last time it had risen this much was in February 2013, mainly due to higher costs for food (2.3 per cent compared to 2.6 per cent in January); housing (4.1 per cent from 4.1 per cent), mostly due to accommodation; healthcare (1.9 per cent from 1.7 per cent), pretty much driven by outpatient services and hospital services; transport (14.8 per cent compared to 12.7 per cent), mostly due to private transport; recreation and culture (0.8 per cent compared to 1.3 per cent), mostly thanks to recreational and cultural services; and education (2 per cent from 2.2 per cent), because of rises in tuition fees.

Price tags fell lower for two commodities: clothing (-2.8 per cent vs -4.4 per cent) and communication (-3.1 per cent vs -2.2 per cent). In contrast, core consumer prices gained 2.2 per cent from a year earlier, compared with estimates of 2.5 per cent and after a 2.4 per cent rise in January, the highest since September 2012. Monthly, consumer prices increased 0.9 per cent, the largest since October 2014, after being flat in January.

The Singapore Dollar's Rise After MAS Move

The Monetary Authority of Singapore, responsible for regulating money supply and exchange rates, said Thursday that it is taking steps to protect the local currency. This will help slow inflation, spurred by various factors, including global economic shocks.

Singapore's central bank raised the interest rate it charges for loans to businesses. It seeks to fight inflation and maintain the growth it ex perienced after it was quarantined during the bioweapon pandemic.

After using its policy band and the slope of appreciation separately in October and January, respectively, the PBoC is now using both tools simultaneously. Specifically, China has raised its policy band and appreciation slope.

In a Bloomberg Television interview, Selena Ling, the head of Treasury Research and Strategy at the OCBC Bank in Singapore, said the Singapore Monetary Authority's new suggestion was more aggressive than the previous two. In contrast, Sophia Ng, a currency analyst at the MUFG Bank in Singapore, said that this was the most hawkish suggestion the Singapore Monetary Authority made.

The Monetary Authority of Singapore's guidance suggested that it may even tighten more at its next monetary policy meeting in October, said Wai Ho Leong, a strategist at Modular Asset Management.

Singapore has been at the forefront of central banks in Asia acting to combat rising price pressures, along with South Korea, which also began tightening policy on Thursday. Singapore and South Korea have both acted quickly to constrain prices. They have led central banks in Asia to change course: most Asian policymakers began acting earlier this year to limit price increases following recoveries from the flu pandemic. Meanwhile, many global peers led by the U.S. Federal Reserve began tightening earlier this year.

The Singapore dollar surged the most in almost a month after the announcement, reaching S$1.3600 by 9:07 a.m. The announcement did not have much of an effect on the trade rate, but it did help push it up.

The central bank said, "This tighter monetary policy stance, which builds on the policy moves in October 2021 and January 2022, will slow the inflation momentum and help ensure medium-term price stability. The fresh shocks to global commodity prices and supply chains add to domestic cost pressures. They will bring MAS core inflation significantly higher than its historical average through 2022. Underlying inflationary pressures remain a risk over the medium term."

The MAS has a unique approach to monetary policy. It uses a trade-weighted dollar to maintain price stability instead of interest rates.

The policy is dictated by the pace of interest rate increases and by how high-interest rates will rise. Before the decision was made to raise interest rates in early 2018 due to inflation, all 16 economists in a Bloomberg forecast predicted a hike. Only six indicated that the base interest rate would be increased in addition to expanding the breadth of the interest rate range.

MAS Tools Explained

These are the three MAS currency band tools:

Re-centering: Before April 2022, the MAS had not used this tool since March 2020, when officials took the previously fixed exchange rate and made it much more flexible to devalue the yuan and combat the pandemic crisis effectively. This is unlike 2011 and before when MAS had to respond to pressures more quickly.

Slope: The most frequently used tool - an adjustment to the slope of the trading band used by MAS to control its basket of currencies - is meant to reflect MAS's projections for expansion or slower growth. The slope of this band's line is adjusted upwards (expansion) or downward (slower growth) by MAS according to its expectations for the economy.

Widening: The other tools we use to guide currency strength are intended to bring stability. One of those tools, fixed exchange rates, has only been used twice in recent history: during the aftermath of the Sept. 11 terrorist attacks and during the Global Financial Crisis (which was abandoned less than two years later). This tool is for when you want volatility instead.


The monetary policy statement was announced simultaneously as the government's special announcement regarding the first-quarter gross domestic product. The economy grew during the first quarter by 3.4 per cent, which is less than the 3.8 per cent increase that analysts had expected.

Singapore's growth prospects are brighter than neighbouring countries in Southeast Asia. This is partly because its restrictive policies from the Covid era have been loosened. For example, the city-state's outdoor mask requirement has been lifted, nightlife has resumed, and travel policies have become more relaxed. The city-state expects that its lead in treating Covid as endemic can help it lead other economies in the region.

In a quarterly policy statement, the Monetary Authority of Singapore said that it expects the economy to grow above-trend in the fourth quarter of this year and for this situation to extend into next year, with the output gap closing significantly. On Thursday, the central bank wrote that it expects the economy to expand by three per cent to five per cent this year after increasing by 7.6 per cent last year.

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