MAS: Policy measures curb rising prices, but Singapore cannot fully escape the impact of global inflation

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SINGAPORE, July 20 – The government’s actions here to tackle inflation will slow its pace over the next year, but the republic cannot completely insulate itself from rising global prices, said Ravi Menon, director General of the Monetary Authority of Singapore (MAS).

“Inflation is likely to get worse before it gets better,” he said yesterday (July 19) at a press conference for the release of the MAS annual report for the last financial year.

Inflation is rising in many countries around the world due to factors such as rising energy costs caused by the Russian-Ukrainian war and supply chain disruptions as many countries have rebounded economically from the impact of Covid-19.

Menon also said interest rates in Singapore “are expected to rise further as global central banks continue to raise rates” to fight inflation. Those higher borrowing costs will add to the debt burden for households and businesses here, he said.

Mortgage rates in Singapore have already risen sharply from a low base.

Central banks such as the United States Federal Reserve raise interest rates to make borrowing more expensive in an effort to slow consumer and business spending and thus eliminate inflationary pressures.

Menon said Singapore’s core inflation rate, which excludes transport and accommodation, is expected to rise to a peak of 4% to 4.5% in the third quarter of 2022.

“It will then stabilize and decline slightly towards the end of this year, although still around 3.5-4%, much higher than what Singapore was used to… Inflation is expected to decline further in 2023 but will remain well above the average rate of 1.5% since 2000.”

When accommodation and transportation costs are included, the consumer price index for all items is expected to be between 5 and 6 percent for all of 2022, Menon said.

Over the past nine months, most recently at the start of this month, the MAS has tightened monetary policy by adjusting the Singapore dollar’s exchange rate against a basket of the country’s major trading partners.

Menon explained that the MAS allows the trade-weighted exchange rate to appreciate faster when inflationary pressures build up to reduce imported inflation and restrain export demand, thereby relieving pressures on the domestic market. work.

This refers to the fact that a stronger Singapore dollar generally makes imports relatively cheaper and exports relatively more expensive for other countries, all other factors being equal.

Monetary policy tightening is estimated to curb core inflation by 0.9 percentage point in the second half of the year.

And across the four monetary policies, the MAS estimates that core inflation will be contained by an average of 1.2 percentage points each year over 2022 and 2023.

These measures will help to mitigate rather than completely offset inflation, he said.

“Strengthening the exchange rate in an attempt to fully offset the impact of world prices risks significantly reducing growth and creating unemployment,” he said.

The government helps fight inflation by providing financial support to vulnerable groups who are less able to bear the steep price increases.

Examples include the S$1.5 billion support package unveiled last month, which will provide 1.5 million adults in Singapore with S$300 in one-time cash payments and utility credits. to all households, among other measures.

“The government has ensured that fiscal support does not add stimulus to the economy that could exacerbate inflationary pressures,” Menon said.

“A period of inflation is not the time to inject expansionary fiscal resources that could aggravate tensions in labour, land and product markets. Budget support has therefore been targeted to the most vulnerable groups and designed to avoid fueling inflation or distorting price signals.

A third key lever for controlling inflation is strong labor market adjustments to prevent inflation from becoming entrenched, Menon said in his keynote address.

“The easing of our border restrictions and the resumption of inflows of foreign workers should help moderate the pressures on labor costs. To avoid a further accumulation of pressures on labor costs, it is important that the influx of non-resident workers continues unhindered,” he said.

Labor market adjustments include ensuring responsible wage agreements to restore workers’ purchasing power. However, care must be taken to prevent the risk of a price-wage spiral, that is, when wages and prices continue, entrenching inflation.

“If real wages are growing faster than real productivity, rising unit labor costs will cause firms to raise prices further to protect their margins, triggering a second round of wage increases and a wage spiral. -price,” Menon said.

While he noted that automatic wage indexation is rare in Singapore and that price pass-through to wages has historically been low, the risk of this spiral cannot be ruled out. This is especially true in the context of a tight labor market and high inflation.

Households are generally able to manage rising interest rates

Menon noted that rising prices and rising interest rates increase the debt service burden, which poses potential risks of default, market volatility and financial instability.

“Domestic interest rates are expected to rise further as global central banks continue to raise rates, adding to the debt service burden on businesses and households,” he said, noting that the Rising interest rates also led to higher credit and mortgage rates. in Singapore.

“MAS is closely monitoring any systemic risk to the financial system arising from debt-related stress in the corporate and household sectors.” He said companies continue to manage debt risks as they have sufficient liquid assets, such as cash and cash equivalents, exceeding their short-term liabilities.

On the household side, the strict limits imposed by the MAS on household borrowing ensured prudent borrowing.

For example, total unsecured debt is limited to 12 times a borrower’s monthly income, while the total debt service ratio caps a mortgage borrower’s overall debt at 55% of their income.

Menon noted that the household debt situation in Singapore “remains generally healthy.”

“The MAS stress tests suggest that most households should be able to service their debts even under scenarios of sharp interest rate hikes and large income losses,” he said. declared.

“But there will be a small segment of households that may be more constrained by rising interest rates.” For vulnerable borrowers, Menon said they can consider restructuring options such as personalized repayment solutions or undertake a debt consolidation plan.

They can also seek help from Credit Counseling Singapore, which helps struggling borrowers work out debt management plans with their creditors.

“As global and domestic interest rates continue to rise, businesses and households need to exercise extreme caution when making new financial commitments,” he said.

“They should plan for further interest rate increases and ensure their ability to repay their loans before making long-term financial commitments.” – TODAY

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