Inflation Looms Over Singapore

Zhang Tao

In a toufu pudding eatery in BukitGombak in west Singapore， aconspicuously posted noticeapologizes to customers for a price hike due to rising costs. The owner told China Report ASEANthat hehad to raise the prices becauseeverything from raw materials to rent and labor is more expensive.

Egg prices jumped from 3.9 to 4.3Singapore dollars in supermarkets in a single month， up nearly 10 percent. Local media reports attributed thehike to rising costs of chicken fodder in egg exporters as well as petroleum and transportation. Supply from local farmers and those in Malaysia alsoshrank due to avian flu.

Oil prices are rising. The cost ofelectricity is rising. Labor costs arerising. Singapore is facing its highest inflation in nine years.

According to a February report onthe Consumer Price Index， a key gaugeof inflation released by the MonetaryAuthority of Singapore （MAS）， January’s core inflation rate， excluding food andenergy prices， hit 2.4 percent， a recordhigh in nine years. Propelling the spike was rising costs of food， energy， andoil.

The situation is likely to beexacerbated by crude oil prices rising to US$105 a barrel over market concernstriggered by Western countries’sanctions on Russia and risinggeopolitical tension in the Russia-Ukraine conflict. The Singaporeangovernment estimated that the coreinflation rate will reach 3 percent as aresult of rising cost of airfare， by themiddle of the year， before easing.

Speaking on CNBC in February，Singapore’s Finance Minister Lawrence Wong commented on the downwardpressure on economic growth and therisks of inflation. “The MAS has been proactively watching over this andtaking steps to dampen inflationarypressure，” said Wong， also DeputyChairman of MAS， noting that fiscalpolicy and monetary policy canrespond to downside risk on growth and inflation， respectively.

Perfect Storm

MAS， Singapore’s central bank，has long sensed the pressure. Ina surprise move on January 25， itannounced a slight increase in therate of appreciation of its NominalEffective Exchange Rate （NEER） policyband to stabilize the price. The NEERis managed against a trade-weightedbasket of currencies from the country’s major trading partners.

“Energy prices have risen furtherwhile imported food inflation remains elevated due to regional supplydisruptions，” explained MAS in astatement on the increase of NEER.“The CPI for airfares has also increased sharply， mostly reflecting the cost ofCOVID-19 testing requirements forinternational travel. The domestic labor market has tightened， with the resident unemployment rate now close to itspre-pandemic level and wage growthabove its historical average.”

The country has continued usingthe tool of quantitative easing since2009. The COVID-19 pandemic forced major economies to further easetheir monetary policy. Coupled withChina-U.S. trade disputes， global supply chains were disrupted. The ongoinggeopolitical tension and threatsto oil supply arising from Russia-Ukraine conflict have complicated the situation. Singapore， highly dependent on international trade， is particularlysensitive to economic headwinds inthe international landscape.

Nicholas Mapa， a senior economistcovering the Philippines market forING， said the MAS has realized thenecessity of moving early. Measurestargeting the supply side are notenough to ease inflationary pressure，he said， noting the January appreciation can be regarded as a preemptivemeasure to relieve the pressure of price rising.

He predicted monetary policy to be further tightened.

Monetary Policy

Central banks and monetary policyauthorities in different countrieshave specific policy goals. The FederalReserve of the United States has twocoequal goals for monetary policy，which are maximum employmentand stable prices. China’s central bankhas multiple goals including annualgoals of stable prices， economicgrowth， sufficient employment andinternational balance of payments， and dynamic goals of financial reform andopening up and growth of the financial market.

The main goal of the EuropeanCentral Bank is to maintain pricestability. Similarly， the MAS works tokeep prices stable as the foundation for sustainable economic growth.

The MAS sets no specific inflation target， but believes an inflation ratearound 2 percent will ensure pricestability.

Unlike other countries which useinterest rate as the main monetarypolicy tool， the MAS keeps prices stable by managing the exchange rate of itscurrency. The MAS allows the exchange rate to fluctuate within a policy band，which is reviewed every six monthsto ensure its alignment with thefundamentals of the economy. This is why the January move surprised themarket： It was an off-cycle monetarypolicy adjustment.

The MAS explained that theexchange rate represents an idealintermediate means of monetarypolicy in the context of the smalland open Singapore economy. “It isrelatively controllable through directinterventions in the foreign exchange markets and bears a stable andpredictable relationship with the price stability as the final target of policyover medium-term，” the MAS said.

Simply put， when Singapore facespressure from rising prices， it increases the appreciation of its currency against that of its major trading partners. Thisempowers the city state to import more goods with less money， which in turnstabilizes domestic prices， and viceversa. The policy tool is based on therealities of the country： a highly openeconomy where a large share of thecore goods is imported. The practice isnot suitable for most economies.

The exchange rate has emergedas an effective anti-inflation tool forthe Singapore economy since it wasadopted in 1981. Except in the early1990s when core inflation rate hit 3.46percent， and during the period from2008 to 2011 when the figure spiked to6.63 percent， Singapore has maintained a stable core inflation rate around 2percent， ensuring stable economicgrowth over the last 30 years.

Singapore’s successfulmacroeconomic policy in recentdecades has been recognized by many economists. Bennett T. McCallum，an American monetary economist atCarnegie Mellon University， is among them. He called the exchange rateframework a tool for monetary policy goals that could serve as a good model for other highly open economies.

However， direct governmentintervention in the exchange ratemarket does bring risks. In 2019，Singapore landed on the currencymanipulator watch list of the U.S.Treasury. In its latest report toCongress in 2021， the U.S. Treasury saidSingapore met two of the three criteriaof a currency manipulator： a currentaccount surplus of at least 3 percentof GDP and persistent， one-sidedintervention in the foreign currencymarket.

The MAS responded that Singaporedidn’t and could not secure tradeadvantages or current accountsurplus by manipulating its currency.Intentionally holding down theexchange rate would cause risinginflation， which would run counterto its prime monetary goal of pricestability.

The MAS attributed the currenthigh account surplus to shifts of thecountry’s economic foundation. Before1984， Singapore had frequent accountdeficits because the country neededmore investment for development.After that year， its economy entered amature period of investment demandshrinking and savings increasing，causing the current account surplus tobecome the new normal.