As of now, we expect neither a recession nor a stagflation in Singapore next year. But there are considerable downside risks in the global economy which bear close watching. MULTI-PRONGED APPROACH TO INFLATION  Dealing effectively with inflation requires a multi-pronged approach. monetary policy to directly dampen inflation fiscal support to help vulnerable groups cope with inflation sound labour market adjustments to prevent inflation becoming entrenched  First, monetary policy to directly dampen inflation. Singapore’s monetary policy is centred on managing the exchange rate of the Singapore Dollar. When inflationary pressures build up, MAS allows the trade-weighted exchange rate to appreciate faster. A stronger exchange rate helps to directly reduce imported inflation as well as restrain export demand, providing relief to labour market pressures. MAS has been proactive in tightening monetary policy in response to rising inflationary pressures, tightening policy four times in the last nine months. In October 2021, MAS slightly increased the rate of appreciation of the trade-weighted exchange rate policy band as a pre-emptive move when core inflation picked up from 0.7% in Q2 2021 to 1.1% in July-August 2021. MAS was among the earlier central banks in the world to begin normalising monetary policy. In January 2022, MAS added slightly to the rate of appreciation of the policy band in an off-cycle move to lean against gathering inflation momentum. This was before the outbreak of war between Russia and Ukraine. In April 2022, MAS re-centred upwards the exchange rate policy band and further increased its rate of appreciation.
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.