This was in view of a fresh impulse to inflation arising from shocks to global commodity prices and supply chains in the wake of the Russia-Ukraine war. And last week, in another off-cycle move, MAS again re-centred upwards the exchange rate policy band to lean against price pressures becoming more persistent. The appreciation of the exchange rate to-date has begun to restrain inflation. The trade-weighted exchange rate has appreciated by close to 4% compared with the beginning of October last year, acting as a filter against rising import prices. Domestic consumer prices have not risen by the same extent as that in the major advanced economies or global commodity prices. Year-to-date, the US and Eurozone have seen inflation rising to record highs of 8.2% and 6.8% respectively. Singapore’s headline inflation has been 5.0% year-to-date. The effects of MAS’ four monetary policy tightening moves are still working their way through the economy and will continue to dampen inflation over the next 12 months. The appreciation of the exchange rate is estimated to dampen core inflation by 0.9% points in H2 2022. Over 2022-23, the four tightening moves to-date is estimated to restrain core inflation by an average of 1.2% points each year. But monetary policy should be applied in a balanced and calibrated manner and not seek to completely offset inflation. Strengthening the exchange rate to try to fully offset the impact of global prices runs the risk of sharply curtailing growth and creating unemployment.
It is important to recognise the global nature of the price pressures we are facing. When there is a pick-up in global food and energy prices of the magnitude we are seeing today, it is not possible to completely insulate the domestic economy from these increases. This brings us to the second component of Singapore’s approach to inflation: fiscal support to help vulnerable groups cope with price increases. The government has stepped in forcefully to support vulnerable groups who are less able to bear the sharp price increases. Fiscal support has been proactive, beginning with the Budget Statement in February 2022 to the $ billion support package announced last month. Measures include cash grants and rebates on utility bills for lower-income households who have been disproportionately affected by higher prices. The government has been careful that fiscal support does not add stimulus to the economy that could exacerbate inflationary pressures. A period of inflation is not the time for expansionary fiscal injections that could add to tightness in labour, land, and product markets. Fiscal support has therefore been targeted at the more vulnerable groups and designed to avoid stoking inflation or distorting price signals. The government has given the assurance that if the inflation situation worsens significantly, it will be prepared to do more. The third component of an integrated approach to inflation control entails sound labour market adjustments to prevent inflation becoming entrenched. These include: relieving labour market tightness through a resumption of inflows of non-resident workers.