Singapore’s Central Bank Gets a Trigger for Tightening

Singapore’s government may have given the central bank a green light to charge ahead with monetary policy tightening this year.

Economists are more confident in their calls that the Monetary Authority of Singapore will exit its neutral stance as soon as the next scheduled decision in April. They’re encouraged after Finance Minister Heng Swee Keat said Monday that the budget position for 2018 will “remain expansionary” as Singapore incurs a small deficit amid greater spending and delayed tax increases.

Into the Red

Singapore revised up its overall surplus for fiscal year 2017 but sees a deficit in 2018

Source: Ministry of Finance
* Revised
** Budgeted

“The impulse to the economy is going to be quite positive” on top of already bright growth and job-market prospects, said Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch. “This makes us more confident that MAS will exit its neutral policy in April. We still think it will be very gradual.”

Read More: Singapore Matches More Problems With More Money in Budget

The central bank stuck to a neutral stance in its previous October decision, while giving itself room to tighten policy if necessary. The MAS, which uses the exchange rate as its main tool, eased three times between January 2015 and April 2016.

The projected budget deficit for next year also had Credit Suisse Group AG economists affirming their forecasts for the period. While immediate tax hikes were limited in the budget, giving less of a bump to inflation, the economy has been picking up and consumption is well supported, said Michael Wan, a Singapore-based economist at the bank.

Given that the economy is expected to “do quite well this year, we still think the MAS will tighten exchange-rate policy,” probably in October, he said.

What Our Economists Say

Singapore’s expansionary budget for FY2018 adds to reasons why the MAS may tighten monetary policy this year, perhaps as soon as April. The 8.3% increase in expenditures will support consumption and investment. Also, the announcement of tax hikes to come for GST may bring forward household spending.

–Tamara Henderson, Bloomberg Economics

Inflation pressures remain muted, with a report on Friday probably showing consumer prices rose 0.4 percent in January from a year ago, the same pace as in December, according to a Bloomberg survey of economists. The MAS forecasts its core inflation measure, which reached 1.3 percent in December, will average 1 percent to 2 percent this year.


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