Singapore Is Latest to Halt Policy Tightening as GDP Shrinks
(Bloomberg) – The Central Bank of Singapore left monetary policy stance unchanged after five straight tightening moves since October 2021, joining a growing list of central banks that have decided to pause amid global growth risks and easing inflation.
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The Monetary Authority of Singapore, which uses the exchange rate as its main policy tool, maintained the currency band’s slope, center and width, according to a statement on Friday. The decision came at the same time as gross domestic product data showed the economy contracted more-than-expected in the first quarter.
Ten out of 22 respondents to a Bloomberg poll had predicted the decision, while the remaining 12 expected it to tighten.
“Given the mounting risks to global growth, the slowdown in domestic activity could be deeper than expected,” the central bank said. “While inflation is still elevated, the MAS’ five consecutive monetary tightening moves since October 2021 have moderated the momentum of price increases. The impact of the MAS monetary tightening is still affecting the economy and should continue to dampen inflation.”
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The pause despite gains lingering at a 14-year high shows policymakers are watching for further signs of economic weakness that would naturally cool inflation. The MAS joins its peers in Australia, Canada, India, Indonesia and South Korea in setting monetary policy frameworks, while others, including the European Central Bank, are nearing the end of their tightening cycles amid financial sector volatility.
Already, the city-state’s GDP shrank 0.7% in the first quarter of October-December, the city-state’s worst contraction in the three months to June 2021. Manufacturing was the worst performer on the back of a drop in output, falling 6%. from a year earlier.
The Singapore dollar weakened 0.35% after the decision suggested some investors were hoping for further MAS tightening.
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Singapore’s GDP growth is expected to weaken significantly this year, in line with the global goods and investment cycle downturn and as demand increases from post-Covid reopening ease, the monetary authority said in the statement. A “severe downturn” in the global electronics industry will have an outsized impact on the region where the sector has a significant manufacturing and trading presence.
That threatens trade-dependent Singapore’s view that it can avoid a recession. The city-state expects growth of between 0.5% and 2.5% this year, a forecast repeated on Friday. Exports, which account for more than one-and-a-half times the island’s GDP, are also expected to fall by 2% in 2023 at worst and post zero growth at best.
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Core inflation – which is tracked most closely by the MAS – will remain elevated over the next few months but should gradually ease in the second half of 2023 and end the year significantly lower, the central bank said.
What Bloomberg Economics Says…
The policy of holding the MAS suggests that it is preparing for a sharp global slowdown. If growth and core inflation slow significantly in the city-state in the second half of the year, as forecast by the central bank, the conditions could be set for an easing at their next meeting in October.
—Tamara Mast Henderson, ASEAN economist
For the full note click here
The “MAS statement is somewhat dovish,” said Selena Ling, head of treasury research & strategy at Oversea-Chinese Banking Corp., adding that core CPI is expected to fall materially by the end of 2023 and “growth is expected to be below will follow the trend year.”
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The MAS warned that Singapore’s GDP growth prospects have clouded over this year as growth from its main trading partners is slower in 2023 than in the previous two years.
“Global growth prospects remain uncertain,” the MAS statement said. “The effects of tighter monetary policy in advanced economies could be amplified by weaknesses in the financial system, further dampening credit growth and dampening confidence. Risks to growth in the global economy and in Singapore are on the downside.”
The city-state’s interpretation of global conditions aligns with the tone from Washington this week, where officials convening for meetings organized by the International Monetary Fund and World Bank have pointed to still-bubbling risks of banking turmoil, constraining credit conditions and downturns could accelerate in many economies.
This puts more focus on global growth risks, even as inflation remains a headache for most global economies, according to the IMF’s latest outlook.
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(Updates detailing central banks that have suspended tightening.)