Global Market: Singapore likely to tighten monetary policy as growth and inflation risks mount

Singapore is expected to tighten monetary policy at its October 14 review as resilient economic growth and rising inflation risks strengthen the case for further policy adjustment, according to a Reuters poll of economists.

All 10 analysts polled by Reuters expect the Monetary Authority of Singapore (MAS) to tighten its monetary policy settings, signalling continued concern over price pressures amid heightened geopolitical uncertainty and rising energy costs.

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The central bank surprised markets in July with a slight tightening of monetary policy, following a similar move in April. Another adjustment would underscore its efforts to contain inflation while supporting economic stability in an uncertain global environment.

The escalating conflict in the Middle East has added to the inflation outlook risks, with oil prices rising even as diplomatic efforts continue between Iran and the United States to reopen the Strait of Hormuz ahead of the November 3 US midterm elections.

OCBC economist Selena Ling said the widening conflict could create further upside risks to core inflation by extending persistent price pressures across goods and services. A particularly strong El Niño weather pattern could also push food prices higher, adding to the inflationary burden.

The weather phenomenon could trigger floods, droughts, extreme heat and crop losses across several regions, with its intensity expected to peak in early 2027. Disruptions to agricultural production could further strain food supplies and raise costs globally.

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MAS likely to make another modest adjustment
Unlike many central banks, Singapore does not primarily use interest rates as its main monetary policy instrument. Instead, the MAS manages monetary conditions by allowing the Singapore dollar to appreciate or depreciate against the currencies of its major trading partners within an undisclosed band, known as the Singapore dollar nominal effective exchange rate (S$NEER).

The central bank can adjust the policy band through three parameters: its slope, midpoint and width. Increasing the slope allows the Singapore dollar to appreciate faster, helping curb imported inflation by making foreign goods relatively cheaper.

Barclays economist Brian Tan expects the MAS to raise the slope of its exchange rate policy band by a modest 25 basis points, reflecting the strength of economic activity as Singapore heads towards 2027, Reuters reported.

The artificial intelligence boom is contributing to relatively robust gross domestic product growth, reinforcing the case for a further policy adjustment, Tan said.

However, the relatively limited pass-through from economic growth to inflation could prevent the central bank from adopting a more aggressive tightening approach. This would allow policymakers to address emerging price risks without imposing an unnecessarily sharp restraint on economic activity, Reuters reported.

Inflation risks remain in focus
Singapore's core inflation stood at 2.2% in August, while headline inflation was 2.3%, official data showed. For 2026, the MAS expects both core and headline inflation to average between 1.5% and 2.5%.

Although inflation remains within the central bank's projected range, rising oil prices and potentially higher food costs could complicate the outlook. The impact of the Middle East conflict on energy, transportation and production expenses could gradually filter through to consumer prices.

Central banks worldwide face renewed challenges in containing inflation as geopolitical tensions threaten energy supplies and raise operating costs for businesses. Higher oil prices can raise freight charges, transportation expenses and manufacturing costs, potentially extending price pressures across multiple sectors.

The US Federal Reserve raised interest rates by 25 basis points last month, while financial markets have also increased expectations of further rate hikes by the European Central Bank as inflation in the euro zone continues to trend higher.

Against this backdrop, the MAS's upcoming decision will be closely watched for signals on how policymakers weigh resilient economic growth against mounting external inflation risks. A modest tightening would indicate that the central bank remains focused on containing imported price pressures while taking a measured approach to the uncertain global outlook, the report by Reuters stated.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)