MAS tightens monetary policy for the second time in a row
The majority of analysts had expected the central bank to keep monetary policy unchanged.
The logo of the Monetary Authority of Singapore on Feb 13, 2026. (Photo: CNA/Ili Mansor)
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SINGAPORE: The Monetary Authority of Singapore (MAS) tightened monetary policy on Monday (Jul 27), in a move contrary to the market's expectations.
The tightening in April followed a period of broad S$NEER appreciation, and helped to dampen inflationary pressures in the economy, but external price pressures are expected to continue to pass through to consumers, said MAS.
The central bank added that the Singapore economy is forecast to record a firm pace of growth in the second half of the year. MAS core inflation, which excludes accommodation and private transport, is projected to pick up from July and remain elevated into early next year.
"MAS will therefore increase the rate of appreciation of the policy band very slightly. The extent of this increase is smaller than that in April," said the central bank in its July monetary policy statement.
It said there would be no change to the width of the policy band and the level at which it is centred.
A tighter policy stance strengthens the Singapore dollar, and can help to reduce imported inflation.
Instead of using interest rates like other central banks, MAS manages monetary policy through the exchange rate. It lets the currency rise or fall against currencies of the country's main trading partners within an undisclosed band.
The central bank can change the slope, mid-point or width of the band.
"In an environment of continued heightened uncertainty, this calibrated adjustment to the policy stance builds on the tightening in April," said MAS.
The move sustains an appropriate appreciation path for the Singapore dollar nominal effective exchange rate (S$NEER) policy band, which will cap inflationary pressures, the central bank said.
It added that it is well positioned to respond effectively to any risk to medium-term price stability, and will continue to closely monitor economic developments.
"MAS also stands ready to curb excessive volatility in the S$NEER," it said.
A Reuters poll of 16 analysts found that 12 expected MAS to leave monetary policy unchanged, and four expected tightening, which would see the Singapore dollar strengthen.
In April, the central bank tightened policy by increasing "slightly" the rate of appreciation of the S$NEER policy band. It did not change the width of the band or the level at which it is centred.
Since then, the S$NEER has stayed in the upper half of the appreciating policy band, said MAS.
MAS also raised the inflation forecast for 2026 to 1.5 to 2.5 per cent at its April meeting.
GROWTH, INFLATION OUTLOOK
The central bank said global economic activity has been more resilient than anticipated. Alternative supplies of oil and gas, as well as existing stockpiles, have tempered the extent of supply disruptions.
At the same time, artificial intelligence-related investments have remained robust, underpinning strong production and trade of IT-related goods and services in some regional economies.
Growth in Singapore's major trading partners is expected to continue in the near term, with the global electronics supply chain being sustained by firm investment spending on technology.
However, energy costs are still elevated and will contribute to inflationary pressures around the world, while weaker real incomes could dampen final consumer demand in some economies.
Domestically, the economy should continue growing at a firm pace, supported by global AI-related capital expenditure, a significant pipeline of public and private projects in the construction sector and strong credit growth in the financial sector.
Earlier this month, the Ministry of Trade and Industry said in its advance estimates that Singapore's economy grew 5.7 per cent in the second quarter, which was stronger than expected.
Singapore's output gap - defined as the economic measure of the difference between the actual output of an economy and its potential - is forecast to widen slightly this year given the strong performance so far and the expectation that GDP will be sustained at high levels in the near term.
In April, the output gap was expected to average around zero per cent for the year.
Core inflation stood at 1.5 per cent for the second quarter, up from 1.2 per cent in January and February before the Middle East conflict began, noted MAS.
Imported costs are likely to rise, with higher fuel and electronic input costs lifting prices for construction materials, capital equipment and food commodities.
"Adverse weather conditions in Singapore’s import sources are expected to lower agricultural output and drive up food prices," said MAS.
Domestic price pressures should be contained as sustained labour productivity growth and moderating nominal wage growth will continue to cap unit labour costs increases.
Electricity and gas inflation is expected to step up, while food, retail and other goods inflation should increase because of imported costs.
The inflation forecast remains at 1.5 to 2.5 per cent for both core and headline inflation this year. It should ease "more discernibly" in the second half of 2027 as global energy prices gradually moderate, said MAS.
But there remains significant uncertainty for the macroeconomic outlook. Inflation could worsen if energy prices spike again, said the central bank.
"Fuel reserves have been drawn down significantly and renewed supply disruptions in the Middle East could cause sharp surges in oil prices," the monetary policy statement said.
Inflation could also persist if robust investment growth generates greater demand spillovers in Singapore and abroad.
On the downside, an unexpected tightening in financial conditions or a pullback in AI-related investment could impact the sustainability of GDP growth and weaken inflation.
WHAT ANALYSTS SAY
Speaking to CNA, OCBC chief economist Selena Ling said the move reflected MAS' recognition that core inflation will continue to go up. This may not subside until around the middle of next year, she said.
"It's probably another insurance or pre-emptive move after the April move. I think the uncertainty really was because we have seen that the US-Iran ceasefire had contributed to energy prices coming off quite sharply.
"But as recent events suggest, there's still a lot of uncertainty as to when an agreement can actually be reached on the Middle East side," said Ms Ling, who is also head of OCBC Group Research.
Mr Barnabas Gan, group chief economist and head of market research at RHB Bank, likewise said the latest move was likely a pre-emptive move "to anchor inflation expectations amid a widening output gap".
But economists Edward Lee and Jonathan Koh from Standard Chartered Bank Singapore were of the view that the move was not a pre-emptive decision by MAS.
While continued robust growth likely led to the central bank tightening again, the MAS has moved with caution given still-high external uncertainty, which should also keep it in "wait-and-see mode", said Mr Lee, chief economist and head of foreign exchange, ASEAN and South Asia, and Mr Koh, senior economist and FX analyst for ASEAN.
As for what comes next, Mr Gan said RHB Bank shifted its view to expect the MAS to tighten policy further in 2026, bringing the S$NEER gradient to 1.50 per cent, with a balance of risk to tighten further towards 1.75 per cent by year-end.
Mr Lee and Mr Koh noted that MAS' stance remains slanted against inflation and that the central bank had highlighted two key inflation risks: the significant drawdown of fuel reserves, and more persistent inflationary pressures due to robust investment growth.
"Its risk profile for growth was largely similar to the April assessment," they said.
"On balance, we still expect the MAS to keep monetary policy unchanged in October, albeit with risks tilted towards further tightening."
OCBC's Ms Ling added that after two consecutive tightening moves, the "pressure is off a little bit".
"But we very much have to monitor how the data continues to play out, because now we are caught between this global AI boom that is turbocharging the Singapore economy, and on the other hand, we're still seeing significant volatility on the global energy price side," she said.
"For the domestic economy, it's kind of, a bit like (a) K-shaped recovery. There are sectors that are growing very well, but there are also sectors that are also facing cost pressures and a bit of a sluggish demand."
