Singapore tightens monetary policy with unexpected measures as inflation risks reignite due to rising oil prices

Singapore unexpectedly tightened monetary policy for the second time in a row on Monday, pre-empting a renewed rise in oil prices even as domestic inflation is under control.

The Monetary Authority of Singapore has announced that it will “very slightly” increase the rate of increase in the policy band for the Singapore dollar’s nominal effective exchange rate, with the adjustment being smaller than in April. The width of the band and its center level remain unchanged.

A Reuters poll of economists last week predicted the central bank would stick to its monetary policy stance.

Unlike most central banks, MAS does not set interest rates, but rather administers monetary policy by managing the exchange rate of the Singapore dollar against a trade-weighted basket of currencies within an undisclosed range.

“The coordinated adjustment in policy stance builds on the April tightening in an environment of continued uncertainty,” MAS said in a statement.

“The majority[of the public]did not want MAS policy to change this round, so this move was not a completely done deal,” Chief Economist and OCBC Group Research Director Selena Lin told CNBC, adding that the second consecutive policy tightening meant MAS was not satisfied with imported inflation.

Singapore’s core inflation rate, which excludes accommodation and transportation costs, rose to 1.6% in June from 1.4% in May, near the bottom of MAS’s forecast range of 1.5% to 2.5% for this year, bringing headline inflation to 1.9%.

BMI, a Fitch Solutions company, said transportation fuel prices have risen sharply since the outbreak of the U.S.-Iran conflict, but easing inflation in services, particularly in health care, communications and education, helped offset much of the upward price pressure.

“Inflation is still expected to rise in the coming months, as import cost pressures typically pass through to broader consumer prices with a delay,” the information group said.

OCBC forecasts that headline and core inflation will overshoot to around 2.5% and 2.3%, respectively, in the coming months, adding that inflation may not fall below 2% until the second half of 2027.

Singapore is almost completely dependent on imports for its energy and is therefore exposed to soaring oil prices.

brent Last week, oil prices rose again to more than $100 a barrel after Houthi militants attacked two Saudi tankers in the Red Sea, deepening a supply threat that had eased before the collapse of the Middle East ceasefire.

The economy has so far avoided disruption as AI demand boosts electronics exports.

Singapore’s gross domestic product (GDP) rose 5.7% in the second quarter from a year earlier, beating the median forecast in a Reuters poll of 5.5% and well above the government’s full-year forecast of 2-4%.