Singapore Dollar To Strengthen Further Following MAS Tightening

Key Highlights

• Inflation pressures caused MAS to tighten the exchange rate policy band.
• This is likely to cause SGD appreciation.
• Further tightening is likely.

The aggressive tightening in recent days by the Monetary Authority of Singapore (MAS) of its exchange rate policy band is likely to lead to a considerable strengthening of the Singapore dollar (SGD), at least to the 1.3200 level by the end of this year.

“The MAS lifted the centre of the policy band at the prevailing rate while steepening the path of the policy band and by raising the mid-point of the exchange rate policy band, the move has now completely unwound the substantial easing that was implemented at the start of the pandemic,” Eugenia Fabon Victorino, head of Asia Strategy for SEB, in Singapore, told FX Empire.

This move has been a reaction to a rising inflation trend in the Asian Tiger, which saw headline inflation in February increase to 4.3 percent year-on-year (y-o-y), while core inflation rose to 2.2 percent y-o-y. As well, according to SEB figures, Singapore’s unemployment rate fell to 2.1 percent in February, meaning that the labour market has already tightened back to pre-pandemic levels.

Additionally, as with many major Asia economies that are reliant on energy imports, Singapore has seen a negative feed-through from ongoing high commodity prices, including crude oil.

“Double tightening its policy, the MAS also slightly increased the rate of appreciation of the Singapore dollar nominal effective exchange rate [S$NEER] policy band, and we now estimate a 1.5 percent per annum rate of appreciation in the S$NEER from the previous 1 percent path,” she added.

MAS Only Raised The Centre Of The Band Three Times Before

The MAS has only raised the centre of the band three times in the past: in April 2008 and April 2010 the centre was adjusted to the prevailing level and in April 2011, the centre was raised below the prevailing level. In all three cases, according to market data, the S$NEER continued to track higher in the months following the re-centring.

Even with the recent rise in inflation, the MAS core inflation is likely to accelerate further in the near term, Victorino underlined. “To protect the purchasing power of the residents, the S$NEER will need to rise further and although the recent tightening policy adjustment is aggressive, we cannot rule out an unscheduled meeting before October if the momentum of cost pressures is not broken,” she concluded.