Inflation may ease next year, but that outlook is still uncertain: MAS

SINGAPORE – Singapore’s central bank believes inflation will abate and the economy will grow, albeit at a much slower pace next year.

But the Monetary Authority of Singapore (MAS) warned that if inflation persists, some of its major trading partners may push their economies to the brink of recession to achieve price stability.

A shrinking economy implies a collapse in the aggregate demand for goods and services and a surge in unemployment, which in turn takes away the incentive to raise prices.

MAS managing director Ravi Menon said the US Federal Reserve, for instance, has been raising its interest rates at the fastest pace in decades, with no impact on inflation so far. If it continues on the path of aggressive monetary policy tightening, the US economy could tilt into recession.

A recession in a major economy, such as the United States or the European Union, would have ripple effects worldwide and will hit Singapore’s export-driven economy as well, said Mr Menon at the launch of MAS’ annual report on Tuesday (July 19). 

The best-case scenario, as outlined in the report, is that inflation will start to ease in the fourth quarter of this year and further moderate in 2023 as supply chain constraints ease, commodity prices peak and major central banks’ interest rate hikes cool down consumer and investment demand.

Economic growth will slow but excess savings held by households and tailwinds for businesses from Covid-19 reopening will keep recession at bay, it said.

However, Mr Menon added: “The outlook is subject to considerable uncertainty.”

He said inflation may remain elevated if fresh shocks to global energy and food supplies arise from the war between Russia and Ukraine – both major producers and exporters of oil and gas, and a variety of food grains and industrial metals.

Supply chain frictions may also worsen if new outbreaks of Covid-19 variants require reimposing mobility curbs to contain the spread of the virus.

To help slow the inflation momentum from imported and domestic cost pressures and ensure medium-term price stability, MAS pre-emptively shifted to a positive rate of appreciation and has tightened monetary policy four times since October last year.