Singapore's Monetary Authority Holds Steady Amid Economic Growth Signs

Singapore's Central Bank Maintains Monetary Policy Amid Economic Recovery

On Monday, Singapore's central bank, the Monetary Authority of Singapore (MAS), decided to keep its monetary policy settings unchanged, aligning with market expectations. This decision comes as new data indicates a rebound in the economy during the third quarter. However, analysts anticipate a possible loosening of policy early next year to mitigate external risks.

The MAS confirmed that it would sustain the current rate of appreciation within its exchange rate-based policy band, known as the Nominal Effective Exchange Rate (S$NEER). Both the width and central level of the band will also remain unchanged, reflecting a cautious but steady approach to monetary management.

Growth Momentum and Balanced Inflation Risks

In its recent statement, the MAS highlighted that the risks to Singapore's inflation outlook are now more balanced compared to three months ago. The central bank noted a positive growth momentum, indicating a healthier economic landscape.

According to advanced trade ministry data, Singapore's gross domestic product (GDP) increased by 4.1% year-on-year in the third quarter, buoyed by a robust manufacturing sector. This growth marked an acceleration from the previous quarter's 2.9% growth rate, prompting policymakers to express optimism for the economic outlook in 2025.

Selena Ling, an economist at OCBC, commented on the improved growth outlook, stating, "The growth outlook is more sanguine." However, she also cautioned about potential risks from geopolitics and trade conflicts, suggesting that the MAS might consider loosening monetary policy during its next review in January.

Concerns Over Tight Monetary Policy

Capital Economics’ market economist, Shivaan Tandon, echoed this sentiment, noting that the risks of maintaining a tight monetary policy for an extended period are becoming increasingly prominent. He predicts that the central bank will need to adjust its stance soon.

The MAS anticipates that Singapore's economy will grow within the upper range of the trade ministry's revised GDP growth forecast for 2024, which is between 2.0% and 3.0%. However, the bank also warned of "significant" uncertainties due to external risks that could impact economic stability.

"A sharp escalation in geopolitical and trade conflicts could exert sizeable drags on global and domestic investment and trade," the MAS stated, emphasizing the challenges ahead.

Singapore's Unique Monetary Policy Approach

Singapore is often viewed as a bellwether for global economic health, given that its international trade significantly surpasses its domestic economy. The MAS employs a distinctive method for managing monetary policy, focusing on adjusting the exchange rate of the Singapore dollar against a basket of currencies rather than relying on domestic interest rates, as is common in many other countries.

The MAS utilizes three primary levers for policy adjustments: the slope, mid-point, and width of the policy band. From October 2021 to October 2022, the central bank implemented five tightening measures—including two off-cycle adjustments—to combat rising inflation during the pandemic and amid global geopolitical instability. Since then, it has maintained a steady policy stance as concerns over economic growth have outweighed inflationary pressures.

Looking Ahead

With a manufacturing-led uptick in economic growth expected to wane amid slowing global demand, Tandon believes that the MAS will need to respond proactively. "With policy very tight by historical standards, the economy set to weaken, and the MAS appearing less concerned about inflation, we expect the central bank to loosen policy in January," he noted.

The MAS has forecasted core inflation to further decline to approximately 2% by the end of 2024, following a decrease from a peak of 5.5% in early 2023. Core inflation reached a 2.5% low in July before edging up to 2.7% in August, signaling a positive trend.