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Snap Insight: With storm clouds rumbling on the economic horizon, MAS did the best thing by doing nothing

SINGAPORE: If 2023 has so far not been your year, we don’t recommend looking at the latest gross domestic product data. The Ministry of Trade and Industry’s advance estimates for first-quarter GDP indicate that the Singapore economy shrank by 0.7 per cent quarter-on-quarter (seasonally adjusted).

And in case that’s not enough gloom for you, the global economy appears to be headed for a slowdown. That’s despite China’s sudden lurch this year away from its zero-COVID policies – so far, that hasn’t resulted in much of a lift in Asia’s exports to China. The return of the Chinese tourist has also proven to be more gradual than many might have liked.

This places the Monetary Authority of Singapore (MAS) in a bind. The economy is losing steam and the horizon rumbles trouble. But what is a central bank to do about inflation?

MAS – as we expected – did nothing.


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It is true that core inflation – which excludes accommodation and private road transport costs – remains at high levels. That measure hit 5.5 per cent year-on-year in January-February following the hike in the Goods and Services Tax (GST) rate. For context, we haven’t seen a reading this high since 2008 – and it’s way above what the MAS considers to be its “historical average” of slightly below 2 per cent.

However, core inflation is set to fall in the coming months.

This is partly a function of base effects. Because prices tend to behave seasonally – think of how prices for bak kwa and haircuts tend to jump around Chinese New Year – we often look at the consumer price index in terms of how much it’s risen compared with a year ago. And last year, the war between Russia and Ukraine broke out in late February, triggering a surge in global energy and food prices – a surge that will start pushing down year-on-year comparisons from March 2023.

At the same time, underlying inflation pressures have eased somewhat. Excluding the effects of the GST hike, we estimate underlying core inflation likely fell from 5.1 per cent in December 2022 to 5.0 per cent in January 2023 and 4.9 per cent in February – compared with the official figures showing an increase to 5.5 per cent in January-February.


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That cooling-off in inflation pressures should show itself more clearly as we move past the GST hike. MAS expects core inflation to slow to around 2.5 per cent in the fourth quarter of this year. If one considers that about 0.5 percentage points of this probably came from the GST hike on Jan 1, this suggests underlying core inflation should return to around 2.0 per cent by the end of 2023.

That’s close to its historical average – and suggests that even if the current level of core inflation is high, MAS’s five back-to-back rounds of aggressive policy tightening since October 2021 have been enough to set it on a path to return to greater normalcy.

With all those storm clouds rumbling on the economic horizon – and the risk of overtightening rising – MAS decided the best thing to do was to do nothing.

Brian Tan is Senior Regional Economist at Barclays.

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