SINGAPORE’S central bank left its monetary policy settings unchanged on Friday (Jul 26) for the fifth straight meeting, in line with market expectations, while expecting gross domestic product (GDP) growth to come in at the higher end of the official forecast range.
“GDP growth is likely to come in closer to its potential rate of 2–3 per cent for the full year,” said the Monetary Authority of Singapore (MAS). This is at the higher end of the Ministry of Trade and Industry’s forecast range of 1 per cent to 3 per cent.
MAS also lowered its full-year forecast for headline inflation to a range of 2 per cent to 3 per cent, but maintained its core inflation forecast range at 2.5 per cent to 3.5 per cent.
MAS said that it will maintain the prevailing rate of appreciation of the Singapore nominal effective exchange rate (S$NEER) policy band, with no change to its width and the level at which it is centred.
Singapore is expected to strengthen over the rest of 2024, with the slight negative output gap closing by year-end, said MAS.
“Barring renewed shocks to costs, core inflation should step down more discernibly in Q4 and fall to around 2 per cent in 2025.”
Against this backdrop, current monetary policy settings remain appropriate, said the central bank. “The prevailing rate of appreciation of the policy band will keep a restraining effect on imported inflation as well as domestic cost pressures, and ensure medium-term price stability.”
MAS said it will “closely monitor global and domestic economic developments, and remain vigilant to risks to inflation and growth”.
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Eighteen out of 19 analysts polled by Bloomberg had expected MAS not to take action during the July review – the third of its new quarterly schedule – while the last expected a reduction of the policy band slope. Most of them also expected the central bank’s tone to be unchanged.
The decision comes after June’s inflation readings came in softer than expected. Core inflation, which excludes accommodation and private transport, was at 2.9 per cent, while headline inflation fell to a three-year low of 2.4 per cent.
Growth and inflation outlook
Giving its growth outlook, MAS noted that economic activity in Singapore’s major trading partners has remained “broadly stable” in recent months.
“In the quarters ahead, global final demand should gain from the anticipated lowering of interest rates and continuing investments in information technology,” it added.
On inflation, MAS said core inflation is expected to “step down more discernibly” in the fourth quarter and into 2025.
Even as some shipping rates have increased, global producer prices have only risen modestly thus far, it noted. Global crude oil prices have also fallen from their recent peak in April, while the prices of most food commodities as well as intermediate and final goods have been stable.
Domestic unit labour costs should also rise at a “significantly slower rate” this year compared to the last two years, as labour market becomes less tight and productivity picks up.
Amid moderate imported inflation and easing domestic cost pressures, the seasonally-adjusted quarter on quarter rate of core inflation has declined to an annualised rate of 2.1 per cent in the second quarter, said MAS.
“The sequential pace of price change, which better captures the most recent inflation in the economy, is expected to be lower in the second half of 2024 compared to H1.”
But both upside and downside risks to inflation remain. The pace of domestic labour cost increases could reaccelerate if aggregate demand turns out stronger than expected, said MAS. And should geopolitical tensions intensify, this could add to imported costs.
Yet if global interest rates stay higher for longer than expected, external demand could weaken and dampen Singapore’s growth momentum. “This in turn would induce a faster pace of easing in cost and price pressures.”
Singapore’s monetary policy settings were last changed in October 2022, when the mid-point of the S$NEER policy band was re-centred higher to the prevailing level then. No change was made to the band’s slope or width.
That was the last of five consecutive tightening moves – two of which were off-cycle adjustments – which began in October 2021.
