A dual adjustment to monetary policy

• The Monetary Authority of Singapore (MAS) has a unique monetary policy setting mechanism. It uses the exchange rate, rather than the interest rates, as its main policy tool.
• The MAS uses the Singapore dollar nominal effective exchange rate (S$NEER) policy band to ensure price stability in the medium term.
• There are three variables that can be adjusted for the S$NEER policy band: 1) the slope of the band or the rate of appreciation, 2) the width of the policy band, and 3) the mid-point of the policy band.
• MAS allows the S$NEER to float within an unspecified band. Should it go out of this band, it steps in by buying or selling SGD.
• On 14 April 2022, the MAS increased the appreciation pace and re-centered the S$NEER policy band higher. There was no change to the width of the band.
• Intrinsically, this decision is more aggressive compared to the last two policy decisions in January 2022 and October 2021 where increases to the slope of the policy band were announced, but the other parameters (including the mid-point of the policy band) were left unchanged.

The growth picture is getting weaker

• Advance GDP estimates for Q1 suggest that economic growth may have moderated to 3.4%, down from 6.1% in the previous quarter. Growth momentum has eased to 0.4% q/q sa, from 2.3% previously.
• The weakness in the manufacturing sector was noteworthy, as it dipped into the red (-1.2% q/q sa), the first decline after four consecutive quarters of expansion. Although this may be expected, it remains important to watch the developments in China with regards to its zero-COVID policy.

Will inflation be tackled?

• Inflation is rising on the back of pent-up demand, higher commodity prices, disruptions to supply chains.
• Singapore’s headline inflation rose at 4.3% y/y in February, the fastest rate in nine years. Core inflation, which strips out private road transport and accommodation costs, eased to 2.2% y/y in February but that is likely to be temporary as the country witnessed the Omicron wave.
• Amid the pandemic and a war, brace for more domestic inflation in electricity and gas, fuel and non-cooked food over the year. These will also mean higher transportation and food service costs.
• Domestic labor market also remains tight, adding upside pressure on inflation.
• The MAS revised up this year’s headline inflation forecast to 4.5-5.5% from 2.5-3.5% previously.
• Meanwhile, the upcoming GST hike in January 2023 will continue to keep inflation elevated heading into the next year as well.
• The MAS policy now allows greater appreciation in SGD against a basket of currencies, which will help to tackle imported inflationary pressures.
• But remain mindful of the fact that such monetary policy changes take time to trickle down through to the economy.

What this means for SGD?

• USD/SGD hit a 7-week low of 1.3510 although some recovery to 1.3540+ levels was seen subsequently.
• But with an aggressive Fed tightening also on the way, scope for significant SGD appreciation is still limited.

What to consider?

• A generally higher-interest-rate environment and monetary tightening may mean REITs could face higher refinancing costs. They could also find it difficult to raise funds for potential acquisitions.
• REITS with foreign exposure such as Elite Commercial REIT, Cromwell European REIT, Prime U.S. REIT and CapitaLand China Trust could see increasing cost pressures given their incomes in different currencies but dividend payments are in SGD.
• REITS with high debt such as Suntec REIT could also see limited upside.