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Singapore Tightens in Surprise Move, Sending Currency Higher

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The Monetary Authority of Singapore announced in a surprise move Tuesday that it was further tightening monetary policy due to upside risks to its inflation forecasts, sending the currency to its highest level since October.

The central bank, which uses foreign exchange as its main policy tool, said it will “raise slightly the rate of appreciation” of the main currency band, while keeping its width and center unchanged. That means it’s allowing the currency to appreciate against its peers in the months ahead to counter imported cost pressures.

The MAS’s first unscheduled action since 2015 and only the third since 2001 came ahead of its scheduled April meeting. It follows Monday’s release of the consumer price index, which hit an 8-year high and prompted the government to review inflation forecasts.

The tightening also precedes the Federal Reserve’s first meeting of the year, in which it’s likely to pave the way for interest-rate increases starting in March.

“This allows MAS more breathing space,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “They don’t want to trip over the same transitory aspects and signaling that the Fed did. There is value for MAS in doing this sooner rather than later.”

Central banks globally are beginning to rein in looser, accommodative policies that helped their economies weather the pandemic as inflation risks mount from supply chain disruptions, rising commodities prices and fiscal stimulus.

The Singapore dollar traded 0.2% higher at 1.3437 the U.S. dollar at 10:03 a.m. local time.
Singapore, which relies heavily on imports, had already taken steps toward tightening in October, when it unexpectedly raised the appreciation path of its currency band.

The MAS noted Tuesday that inflation has shifted higher since that decision, and that “pandemic-related and geopolitical shocks” pose risks for further increases. It raised its inflation forecasts for 2022, projecting core prices to rise 2% to 3%, from 1% to 2% expected in October.

“While core inflation is expected to moderate in the second half of the year from the elevated levels in the first half as supply constraints ease, the risks remain skewed to the upside,” the MAS said.

The city-state’s economic recovery is expected to extend to domestic-focused and travel-related areas this year as pandemic restrictions are eased, the MAS said. Gross domestic product on track to grow 3% to 5% this year, it added, reiterating a government forecast in November.