Unlike most central banks which manage monetary policy through the interest rate, the MAS uses the exchange rate as its primary policy tool.
This is the S $ NEER – the Singapore dollar exchange rate managed against a trade-weighted basket of currencies of Singapore’s major trading partners.
The S $ NEER is allowed to float in an unspecified band. In the event of an exit from this band, the MAS intervenes by buying or selling Singaporean dollars.
The central bank also changes the slope, width, and midpoint of this band when it wants to adjust the pace of local currency appreciation or depreciation based on assessed risks to Singapore’s growth and inflation.
The Singapore dollar appreciated against the US dollar after the announcement and was last seen trading at 1.3490 at 9:16 a.m.
GROWTH AND INFLATION OUTLOOK
Preliminary data released separately on Thursday morning showed Singapore’s economy grew 6.5% year-on-year in the third quarter, slowing from the 15.2% growth in the previous quarter.
The MAS, in its report, said Singapore’s economy is expected to “maintain a sustained growth rate” over the next few quarters, thanks to strengthening external demand and picking up domestic spending.
Growth in the trade-related and modern service sectors will be supported by the resilient cycle of electronics and improved business activity. Country-oriented and travel-related clusters could also see some improvement as Singapore moves towards life with COVID-19 as an endemic, he added.
“Barring the materialization of extreme risks such as the emergence of a vaccine-resistant virus strain or severe global economic strains, Singapore’s economy is expected to remain on an expansion path overall,” MAS wrote.
“The slowdown in the labor market is expected to continue to be absorbed and the negative output gap to close in 2022.”
At the same time, core inflation – a key policy consideration for the MAS – hit a two-year high of 1.1 percent in August.
This mainly reflects the rise in global commodity prices, which impacted electricity and gas prices and the inflation of uncooked food. At the same time, rising labor costs have fueled inflation in some domestic consumer goods such as food services, the central bank said.
Over the next few quarters, inflation is expected to experience a “widespread recovery” due to rising import and labor costs, as well as a pickup in domestic activity.
“Imported inflationary pressures are expected to persist for some time against a backdrop of strengthening global demand and persistent supply constraints. Domestically, wage growth is expected to be strong alongside the weakening of the labor market until next year.
“Cumulative business costs will spill over into consumer price inflation as the national economy reopens and private consumption recovers. Various increases in service charges that have been suspended since the start of the pandemic, such as for transportation, health care and education, could also resume, ”he writes.
Inflation in private transport is expected to moderate next year against a slower rate of increase in COE (Certificate of Entitlement) premiums and gasoline costs. But accommodation inflation is expected to remain firm amid construction delays.
With that, MAS said headline inflation will hit around 2% this year and average 1.5-2.5% next year.