SGD: Policy-induced appreciation to counter inflation – DBS

DBS Group Research economists Taimur Baig and Chua Han Teng argue that recent commodity price shocks will inevitably lift inflation in Singapore, but highlight the role of the Singapore Dollar and policy buffers. They expect the Monetary Authority of Singapore (MAS) to allow further appreciation of the Singapore Dollar (SGD) Nominal Effective Exchange Rate (NEER) to contain imported inflation, complementing targeted fiscal measures and ample reserves that support economic resilience.

MAS seen tightening SGD NEER stance

"Such shocks permeate through Singapore’s economy readily. Gasoline prices may get adjusted immediately, electricity and electronics prices may rise with some lag, but it is just a matter of when, not if; higher inflation in the near term appears to be unavoidable."

"Beyond targeted fiscal policy, Singapore’s unique exchange rate-based monetary policy will also likely play a crucial role in containing imported inflation and anchoring inflation expectations. We expect the Monetary Authority of Singapore to undertake a policy-induced appreciation of the Singapore dollar nominal effective exchange rate."

"Given such considerations, we find Singapore’s measured public sector response to the ongoing crisis to be in line with best practice. Preventing price signals to permeate through the economy by means of across-the-board subsidy and price controls is not advisable, as they prevent necessary economic adjustments and distort incentives."

"Instead, the authorities have highlighted that the nation has ample reserves to ensure unimpeded supply of energy domestically and sufficient financial buffers to procure what’s needed externally. Concurrently, they have cautioned about higher prices in the pipeline."

"Informing the public about the risks to the outlook, from higher inflation to lower growth, while assuring them about the wherewithal to deal with likely contingencies strike a balance between caution and resolve. Global shocks inevitably hit Singapore; there is not much one can do about that."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)