Singapore stops tightening amid faltering growth

SINGAPORE – Singapore’s central bank defied expectations that it would tighten monetary policy for a sixth time since October 2021, announcing on Friday (April 14) that it would keep its policy settings unchanged despite stubborn price pressures at a 14-year-high and amid advance estimates that first-quarter economic growth fell well short of expectations.

The bellwether city-state had been among the first countries to tighten in response to rising inflation, though the latest move suggests the Monetary Authority of Singapore (MAS) has grown more concerned about the darkening global growth outlook in the wake of recent turbulence that has shaken American and European banking sectors.

“Concerns of a growth slowdown seem to be outweighing inflation, despite elevated core inflation in recent months,” said senior economists Chua Hak Bin and Lee Ju Ye of Maybank Kim Eng Research.

In a research note reviewed by Asia Times, the pair wrote they had expected a “final re-centering of the [policy] band up to its prevailing level given sticky and elevated core inflation.”

The MAS uses exchange rates, managed against a trade-weighted undisclosed basket of currencies from Singapore’s major trading partners, instead of interest rates as its primary policy tool to manage imported inflation.

Pre-announcement polling from Reuters and Bloomberg had put analysts expecting no change to monetary policy at all in the clear minority.

But in hitting pause, Singapore joins central banks in Australia, India, South Korea and Canada that have refrained from continued tightening, with the MAS in a statement saying that previous moves were “still working through the economy and should dampen inflation further,” describing its current stance as “appropriate for securing medium-term price stability.”

“The MAS cautioned that Singapore’s growth outlook has dimmed as the drag on global investment and manufacturing from tighter financial conditions will intensify in the coming quarters. The sharp downturn in the global electronics industry in particular has been a major negative shock,” noted Maybank Kim Eng economists Chua and Lee.

Gross domestic product (GDP) was up 0.1% year-on-year in the three months to March after a 2.1% gain in the fourth quarter of last year. But on a quarter-on-quarter seasonally adjusted basis, GDP contracted 0.7%, marking the first contraction since the second quarter of 2022. Analysts surveyed by Bloomberg had only expected a 0.1% contraction.

Data showed slowing growth was led by a decline in manufacturing activity, which has contracted for five consecutive months. Advance estimates point to manufacturing, a key growth engine, cratering 6% year-on-year, after a 2.6% drop in the previous quarter, mainly due to weakness in the global electronics industry and a slowdown in demand for semiconductors.

At the start of the year, analysts had certain hopes that a potential Chinese economic rebound would help Singapore outperform its downbeat official growth forecast, which remains unaltered at between 0.5% to 2.5% this year, down from 3.6% in 2022.

But thus far, China’s post-pandemic reopening has yet to provide a significant boost to trade-reliant Singapore’s exports.

China’s recovery is tipped to be “consumption-driven and oriented towards domestic services, hence the positive spillovers for regional economies can be limited in the near-term,” said Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, who added that official forecasts had conveyed recognition of “enhanced downside risks” for both the Singapore and global economies. 

Ling noted that Singapore’s Ministry of Trade and Industry (MTI) had cited fragilities in the financial system in its outlook, which she interpreted as “likely a nod to the recent bank developments in the US and Europe which had contributed to some market concerns that credit conditions will tighten and partially mitigate the need for future monetary policy tightening.”

Though financial markets have stabilized since the bank failures in March, MAS Chairman Tharman Shanmugaratnam said earlier this week that the central bank is ready to provide liquidity to banks to ensure that the financial system remains stable. MAS had previously said Singapore’s banking system had “insignificant exposures” to the failed lending institutions.   

Ivan Tan, a banking analyst at S&P Global Ratings, told Asia Times that funding and liquidity have “remained healthy” for banks in Singapore, which boast “adequate capitalization and good provisioning buffers to absorb changes in business cycles. They are also cushioned against idiosyncratic risks emanating from exposure to regional developing markets.”

“Funding costs are starting to catch up as depositors have been shifting into higher-yielding fixed deposits, and the proportion of low-cost current and savings account deposits has steadily declined over consecutive quarters.” Tan said this “reflects the transmission of higher interest rates that influence the behavioral aspects of customers, rather than any deterioration in confidence.”

The MAS left its inflation forecasts unchanged in Friday’s announcement, the first of its scheduled biannual policy statements with the next occurring in October.

Headline inflation for 2023 is still expected to be between 5.5% and 6.5%, while core inflation, which excludes accommodation and private transport, is forecast to come in at between 3.5% to 4.5%.

The core inflation rate, the central bank’s preferred price measure, rose to 5.5% in January and February on a year-on-year basis and is at its highest since November 2008, being well above MAS’ inflation target. The headline consumer price index, or overall inflation, was up 6.3% year-on-year in February, easing slightly from 6.6% the previous month.

The MAS expects core inflation to slow discernibly in the second half of the year to around 2.5%, a target that Maybank Kim Eng economists Chua and Lee are skeptical of “given the persistent wage pressures from the tight labor market and expansion of the Progressive Wage Model,” a wage structure intended to uplift resident lower-wage workers across various sectors through annual wage increases.

“Core inflation remains sticky and will likely fall slowly,” the pair contends. “However, tightening credit conditions and rising short-term interest rates may dampen investment and consumer spending, causing inflation to fall more quickly as growth slumps.”

Chua and Lee expect the MAS to maintain its current appreciation stance at the next policy meeting in October. The two economists lowered their 2023 full-year growth forecast to 0.8% from 1.7% due to weak first-quarter performance and rising downside risks to global growth.

“Singapore risks entering into a technical recession if the boost from China’s reopening fails to materialize in the second quarter,” said Chua and Lee, whose modeling forecasts a 31% probability of recession in the city-state as of March.

Follow Nile Bowie on Twitter at @NileBowie