By Zhang Tao

Singapore is facing its highest inflation in nearly a decade

in a toufu pudding eatery in Bukit Gombak in west Singapore, a conspicuously posted notice apologizes to customers for a price hike due to rising costs. The owner told China Report ASEAN that he had to raise the prices because everything from raw materials to rent and labor is more expensive.

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

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

According to a February report on the Consumer Price Index, a key gauge of inflation released by the Monetary Authority of Singapore (MAS), January’s core inflation rate, excluding food and energy prices, hit 2.4 percent, a record high in nine years. Propelling the spike was rising costs of food, energy, and oil.

The situation is likely to be exacerbated by crude oil prices rising to US$105 a barrel over market concerns triggered by Western countries’ sanctions on Russia and rising geopolitical tension in the Russia-Ukraine conflict. The Singaporean government estimated that the core inflation rate will reach 3 percent as a result of rising cost of airfare, by the middle of the year, before easing.

Speaking on CNBC in February, Singapore’s Finance Minister Lawrence Wong commented on the downward pressure on economic growth and the risks of inflation. “The MAS has been proactively watching over this and taking steps to dampen inflationary pressure,” said Wong, also Deputy Chairman of MAS, noting that fiscal policy and monetary policy can respond to downside risk on growth and inflation, respectively.

Perfect Storm

MAS, Singapore’s central bank, has long sensed the pressure. In a surprise move on January 25, it announced a slight increase in the rate of appreciation of its Nominal Effective Exchange Rate (NEER) policy band to stabilize the price. The NEER is managed against a trade-weighted basket of currencies from the country’s major trading partners.

“Energy prices have risen further while imported food inflation remains elevated due to regional supply disruptions,” explained MAS in a statement on the increase of NEER. “The CPI for airfares has also increased sharply, mostly reflecting the cost of COVID-19 testing requirements for international travel. The domestic labor market has tightened, with the resident unemployment rate now close to its pre-pandemic level and wage growth above its historical average.”

The country has continued using the tool of quantitative easing since 2009. The COVID-19 pandemic forced major economies to further ease their monetary policy. Coupled with China-U.S. trade disputes, global supply chains were disrupted. The ongoing geopolitical tension and threats to oil supply arising from Russia-Ukraine conflict have complicated the situation. Singapore, highly dependent on international trade, is particularly sensitive to economic headwinds in the international landscape.

Nicholas Mapa, a senior economist covering the Philippines market for ING, said the MAS has realized the necessity of moving early. Measures targeting the supply side are not enough to ease inflationary pressure, he said, noting the January appreciation can be regarded as a preemptive measure to relieve the pressure of price rising.

He predicted monetary policy to be further tightened.

Monetary Policy

Central banks and monetary policy authorities in different countries have specific policy goals. The Federal Reserve of the United States has two coequal goals for monetary policy, which are maximum employment and stable prices. China’s central bank has multiple goals including annual goals of stable prices, economic growth, sufficient employment and international balance of payments, and dynamic goals of financial reform and opening up and growth of the financial market.

The main goal of the European Central Bank is to maintain price stability. Similarly, the MAS works to keep prices stable as the foundation for sustainable economic growth.

The MAS sets no specific inflation target, but believes an inflation rate around 2 percent will ensure price stability.

Unlike other countries which use interest rate as the main monetary policy tool, the MAS keeps prices stable by managing the exchange rate of its currency. The MAS allows the exchange rate to fluctuate within a policy band, which is reviewed every six months to ensure its alignment with the fundamentals of the economy. This is why the January move surprised the market:It was an off-cycle monetary policy adjustment.

Kreta Ayer District of Singapore, popularly known as Chinatown, ahead of the Lunar New Year festive period on January 29, 2022. (JOSEPH NAIR)

The MAS explained that the exchange rate represents an ideal intermediate means of monetary policy in the context of the small and open Singapore economy. “It is relatively controllable through direct interventions in the foreign exchange markets and bears a stable and predictable relationship with the price stability as the final target of policy over medium-term,” the MAS said.

Simply put, when Singapore faces pressure from rising prices, it increases the appreciation of its currency against that of its major trading partners. This empowers the city state to import more goods with less money, which in turn stabilizes domestic prices, and vice versa. The policy tool is based on the realities of the country:a highly open economy where a large share of the core goods is imported. The practice is not suitable for most economies.

The exchange rate has emerged as an effective anti-inflation tool for the Singapore economy since it was adopted in 1981. Except in the early 1990s when core inflation rate hit 3.46 percent, and during the period from 2008 to 2011 when the figure spiked to 6.63 percent, Singapore has maintained a stable core inflation rate around 2 percent, ensuring stable economic growth over the last 30 years.

Singapore’s successful macroeconomic policy in recent decades has been recognized by many economists. Bennett T. McCallum, an American monetary economist at Carnegie Mellon University, is among them. He called the exchange rate framework a tool for monetary policy goals that could serve as a good model for other highly open economies.

However, direct government intervention in the exchange rate market does bring risks. In 2019, Singapore landed on the currency manipulator watch list of the U.S. Treasury. In its latest report to Congress in 2021, the U.S. Treasury said Singapore met two of the three criteria of a currency manipulator:a current account surplus of at least 3 percent of GDP and persistent, one-sided intervention in the foreign currency market.

The MAS responded that Singapore didn’t and could not secure trade advantages or current account surplus by manipulating its currency. Intentionally holding down the exchange rate would cause rising inflation, which would run counter to its prime monetary goal of price stability.

The MAS attributed the current high account surplus to shifts of the country’s economic foundation. Before 1984, Singapore had frequent account deficits because the country needed more investment for development. After that year, its economy entered a mature period of investment demand shrinking and savings increasing, causing the current account surplus to become the new normal.