The Monetary Authority of Singapore (MAS) tightened its exchange-rate-based monetary policy on Monday, steepening the slope of the Singapore dollar's trading band for the second time in three months. The decision caught a majority of economists off guard, with most surveyed ahead of the announcement expecting the central bank to hold policy unchanged.
MAS said it would slightly increase the rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, while keeping the width and the level at which the band is centred unchanged. The central bank, which uses the exchange rate rather than interest rates as its main policy lever, cited stronger-than-anticipated growth and firmer underlying inflation as the basis for the shift.
Growth Adds to the Case for Tightening
Singapore's economy expanded 5.7% year-on-year in the second quarter, according to advance estimates from the Ministry of Trade and Industry, well above the pace most private-sector forecasters had penciled in earlier this year. Core inflation, the measure MAS watches most closely, rose to 1.5% in June from 1.2% in May, driven by services costs and a pickup in retail prices.
"The recalibration reflects an economy that is running hotter than the central bank's own models assumed just two quarters ago," said Selena Ling, chief economist at OCBC Bank, in a note to clients following the announcement. MAS itself said in its accompanying statement that core inflation is expected to average between 1.5% and 2.5% for the full year, a range unchanged from its April guidance but one the central bank now views as carrying upside risk.
Monday's move follows an April tightening that ended a run of five consecutive policy reviews in which MAS had either eased or held steady. Coming twice within a single year, the back-to-back adjustments mark the central bank's most active tightening stretch since 2022.
Energy Markets Flagged as Main Risk
A pre-announcement survey of 18 economists by local media had found 13 expecting no change and five anticipating a hold with more hawkish language, according to figures cited by Bloomberg and CNBC. None of the respondents in that survey had forecast an outright band-slope increase, making Monday's decision one of the more consequential policy surprises for the city-state this year.
MAS flagged volatility in global energy prices and ongoing supply-chain adjustments across the region as the principal risks to its inflation outlook going forward. The central bank said it would continue to monitor incoming data closely and stood ready to adjust policy again at its next scheduled review in October if conditions warrant.
Following the announcement, the Singapore dollar strengthened against the US dollar in local trading, while economists at several regional banks revised their year-end policy forecasts. Analysts at DBS and UOB said in separate client notes that they now expect the S$NEER slope to be maintained through the October review, with a roughly even split on whether a fourth consecutive tightening remains on the table before year-end.