Singapore’s central bank is poised to tighten policy on Tuesday as the Iran war drives up import costs and threatens to push inflation beyond current projections, potentially becoming one of the first in Asia to adjust settings following the Middle East conflict.
Fifteen out of 18 economists in a Bloomberg survey expect the Monetary Authority of Singaporeto tighten policy at its April 14 review. Three forecast no change. An escalation in the Middle East and the possibility of a global recession were cited as the biggest tail risks in the survey conducted between March 27 and April 9. Track US-Iran war live updates.
On Tuesday, the trade ministry will also release how the economy fared in the first quarter after Singapore warned that growth will take a hit this year. Economists expect Singapore’s gross domestic product to shrink by 0.9% in the first three months, compared with the fourth quarter. On an annual basis, the economy is estimated to have expanded 6%.
The MAS, which holds four policy reviews per year, has flagged it will update its inflation outlook — a signal economists say could intimate a policy move. Core inflation this year is likely to be at 1.9%, according to the median in the survey, that’s at the upper end of the government’s projection in February.
Unlike most central banks that use interest rates, Singapore maintains medium-term price stability by managing its currency against a trade-weighted basket — the S$NEER — within an undisclosed target band. The Singapore dollar has slipped against the greenback since the war in Iran started. Still, it’s outperformed its Southeast Asian peers.
Singapore’s near-total reliance on imported energy leaves it exposed to the Middle East crisis. Fuel, electricity and transport costs are already rising, with businesses facing higher logistics and input prices. While the immediate impact is on headline inflation, economists warn the risk is that these pressures broaden over time.
Indeed, Foreign Affairs Minister Vivian Balakrishnan last week warned that the economic fallout from the war could worsen.
“I’m quite sure the markets are not fully pricing the worst-case scenario,” Balakrishnan told Bloomberg Television’s Avril Hong.
The geopolitical situation has shifted expectations toward a tightening bias.
“Past policy episodes illustrate how large swings in global energy prices can influence Singapore’s inflation outlook and, by extension, monetary policy settings,” Oversea-Chinese Banking Corp. strategist Christopher Wong wrote in a note April 10.
He expects the MAS to tighten by raising the slope of the S$NEER. There’s also an outside chance of the central bank steepening the slope and recentering the policy band upwards, Wong added.
The Singapore dollar has strengthened steadily and is nearing the top of its policy band, according to Goldman Sachs Group Inc. estimates. This could signal that some investors are increasingly positioned for a tightening stance from the central bank as early as the April decision.
What Bloomberg Economics Says…
“If SGDNEER continues to trade near the strong edge of the targeted currency band, MAS tightening would involve a re-centering of the band, an increase in the slope of the band, or both. We expect at least a re-centering, if not more.”
— Tamara Mast Henderson, economist
— To read the full note, click here.
The case for tightening rests on how policymakers view the impact of the Middle East conflict. While higher energy costs are pushing inflation higher, the same shock threatens to weigh on global trade and demand — a key risk for Singapore’s highly open economy.
For MAS, the choice is increasingly stark: lean against a fresh inflation shock driven by war, or hold back as the same shock begins to weigh on growth.
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