Will MAS Stay the Course or Ease in 2025?
Assessing Inflation Risks and the Case for Policy Stability.
Guest Written by Kiven Singh
In their policy statement on October 2024, the Monetary Authority of Singapore (MAS) forecasted a more balanced inflation outlook for 2025, with core inflation expected to average around 1.5–2.5%. The forecast was based on an entrenched disinflation momentum and projected declines in imported inflation supported by a weaker USD. However, the inflation environment for 2025 has since become more complex, with greater risks skewed on the upside. The main difference here is the downward pressure on the S$NEER as the Dollar rallies on more optimistic US sentiment and inflation concerns from Trump’s expansive fiscal and immigration policies.
The MAS now faces a complex trade-off: while disinflationary progress in 2024 supports a softer policy stance, higher Trump-led inflation in the US suggest that maintaining stability in the SGD remains crucial.
Against this backdrop, our base case anticipates a slight reduction in the slope of the S$NEER policy band at MAS’s Jan 25 meeting, supported by progress in disinflation and sufficient labour market slack to mitigate inflationary pressures from stronger-than-expected GDP growth. However, with heightened Trump-led USD strength and lingering upside inflation risks, we acknowledge the case for MAS to opt to maintain its current stance in Jan 25, reserving policy adjustments for subsequent meetings.
This analysis will examine the disinflationary environment, external inflation risks, and MAS’s historical reaction function to assess likely policy outcomes.
Singapore’s Current Macro Regime:
We’ve had good progress with inflation…
On the surface, 2024’s inflation figures indicate an entrenched disinflation path. Although the overall 3M/3M saar Core Inflation for 2024 stands at 2.26%, higher than the pre-pandemic average of 1.48%, the significantly lower Sep-Nov 24 figure of 0.56% signals a promising slowdown in inflation.
Much of the progress was due to the dislodging of key components that were causing inflation stickiness in early-2024:
Food, accounting for a substantial 21.1% of the CPI basket, slowed to 2.4% due to weaker global demand and robust crop production. This is a significant drop from 2023's levels of 3-8%.
Natural gas – which accounts for 95% of Singapore’s energy – face a similar narrative. With the import price of natural gas declining for the 4th consecutive month as of Nov 24, at -6.4% YoY.
Further underscoring the disinflation track is a general easing of global freight costs. Firms have adjusted their shipping strategies to manage disruptions from geopolitical shocks. The New York Federal Reserve’s Global Supply Chain Pressure Index has slowed from its August peak and remained below 0 for the third consecutive month as of Dec 24, indicating easing supply chain conditions.
And domestically, higher-than-expected growth is expected to have limited inflationary effect.
At first glance, higher GDP figures may deceptively point towards higher demand-driven inflation:
Early MTI Estimates of 2024’s annual GDP printed higher at 4.0%, significantly higher than MAS’s original forecasts of it being “around the upper end of the 2–3% forecast range”.
Having closed its negative output gap in 2H24, Singapore is now operating with a near-zero output gap. This creates a precedent for higher inflation, as stronger economic growth drives higher derived demand for labour, disrupting the ongoing easing in the labour market.
Early MTI estimates indicate that higher growth in 2024 was driven by a manufacturing recovery in electronics (4Q24: 4.2% YoY) and increased IT & Communications activity (4Q24: 3.7% YoY) in 4Q24, boosted by higher exports during the electronics cycle and front-loading ahead of the anticipated Trump Tariff.
However, demand-push inflation is unlikely as we argue that there is sufficient labour market slack in high-growth sectors, dampening inflationary effects from higher labour demand. Job Vacancy Rates for Electronics Manufacturing sit at 1.90% as of Sep 24, even lower than the pre-pandemic average of 2.25% (2011-2018). As such, the gains made in these sectors will unlikely translate to significantly greater domestic spending that would otherwise push inflation higher.
In the broader labour market, there exists more concrete evidence of easing
Nominal wage growth rose marginally to 4.3% YoY in 3Q24, up from 4.1% in 2Q24. Despite this increase, wage growth remains below the 2023 average of 5.3%, reflecting continued cooling in labour market conditions.
Though it must be stated that nominal wage growth typically takes longer to slow down. Structural factors, such as the Progressive Wage Model and sustained demand for health and education workers, have kept wage increments firm in certain sectors, slowing the pace of overall moderation.
Recruitment rates – a more forward-looking measure of labour market conditions – has softened to 2.1% in Q3 2024, down from 2.3% in the previous quarter and significantly below the peak of 2.8% in Q2 2022. This slower hiring demand from companies, likely to temper nominal wage growth for job switchers into 2025.
Simultaneously, rising productivity, higher capacity utilization, and increased fixed capital formation have contributed to containing unit labor costs (ULC). These factors collectively underpin the broader disinflationary environment, reinforcing the case for policy easing at the January 2025 MAS meeting.
Base Case: As such, given a steady disinflation path and sufficient slack in high-growth sectors, MAS has sufficient room for a looser monetary policy. TAM’s base case is a slight reduction in the S$NEER policy slope while maintaining its appreciation pathway. However, despite this, we believe there some reason to believe that MAS could keep the policy slope unchanged.
1. Widening UST-SGS spreading drives near-term SGD weakness, but strong demand for SGS and a possible fizzling out of USD strength in the medium-term may reduce MAS’s urgency to ease its policy stance.
The biggest change in 2025’s outlook is Trump’s re-election and the inflationary impacts of his anticipated tariffs. Greater inflation expectations under Trump, coupled with concerns about the sustainability of the US fiscal deficit—driven by potential policies like large-scale infrastructure spending and tax cuts—have fuelled a rally in UST yields. Expectations of a shallower rate-cut cycle have further pushed yields on long-dated UST bills higher. This rise in UST yields, outpacing that of SGS, has widened the UST-SGS spread, exerting downward pressure on the SGD as capital shifts toward USD-denominated assets.
While SGD weakness could justify MAS easing its monetary policy, the TAM team believes that there is reasonable argument for MAS to not ease the slope of the S$NEER band.
Firstly, the pass-through effect of rising UST yields on SGS yields is partial, this may help stabilise the SGD, leaving room for MAS to keep its policy stance unchanged. Historically, the pass-through effect of rising UST yields to SGS yields has been partial due to structural differences between the two markets. There are two reasons for this:
First, there is thinner volume of SGS trading as Singapore does not rely heavily on bond issuance for infrastructure building, limiting the supply of SGS and dampening the pass-through effect.
Second, Singapore’s fiscal discipline, from balanced budget and minimal debt, makes investors see SGS as a safer asset than UST, especially in contrast to rising US debt sustainability concerns.
These factors enhance demand for SGS, acting as a temporary buffer to the downward pressure on the SGD.
Secondly, it is possible that the current USD strength may start to fizzle if Trump's policies turn out to be softer than initially expected, reducing the downward pressure on the SGD. As it stands, much of the dollar’s trajectory will hinge on his actions during the first 30 days in office.
Trump’s aggressive trade rhetoric, including promises of blanket 10% tariffs and off-the-cuff remarks such as imposing tariffs of up to 25% on Canada and Mexico, could fuel further USD appreciation and extend the rally into mid-2025. These comments have already triggered market volatility, which is likely to persist in the coming weeks.
However, we are more bearish on this front, believing that Trump might not be able to completely fulfil this tariff promise within the first 30 days. Reports indicate that Trump aides are pushing for a more restrained approach, with Trump’s aides indicating plans to limit tariffs to key inputs rather than broad-based measures. If these policies are scaled back or delayed, USD strength may fizzle and the SGD is more likely to stabilise, reducing the urgency for MAS to adjust its policy slope.
2. Upside risks on imported inflation remain…
LNG Prices are expected to rise from stronger demand from China and South Asia. And while this might may not trickle down immediately into Singapore, as it will be briefly mitigated by 3.4% drop in electricity tariffs by SP Group in 1Q25, we expect SP group to revise their tariffs upwards through the year.
While food prices in 2025 are likely to remain benign and continue easing from 2024, risks remain skewed to the upside for Singapore’s key trading partners due to geopolitical and climate challenges. 2025’s La Niña event is expected to disrupt palm oil and rice production in Indonesia and Malaysia, excessive monsoons from the event are likely to disrupt India’s rice and sugar production.
Geopolitical uncertainty — the threat of US tariffs and instability in the Middle East affecting the Red Sea trade corridor – is likely to keep food producers on the more cautious side, producing more conservative volumes to minimise losses.
3. Finally, MAS has historically acted more assertively during periods of high inflation than during downturns with low inflation and a negative output gap…
MAS has demonstrated an asymmetric reaction function, prioritising the containment of imported inflation at high levels, over closing a negative output gap.
Empirical findings from Cavoli et al., 2022 suggest that for every 1% increase in the inflation gap, there is a statistically significant 3.09%-3.95% higher likelihood that MAS adjusts its S$NEER policy stance—through changes to the slope, mid-point —to address inflationary pressures. However, this relationship is only significant during periods of high inflation – at the 50th and 75th percentile of Singapore’s historical inflation levels.
No statistically significant change in monetary is seen at lower levels of inflation, nor with an increase in negative output gap.
And this makes sense: Given Singapore’s high import content in exports, currency depreciation is an ineffective tool for stimulating growth. However, in contrast, a strong SGD has much more utility in serving as a highly effective tool for controlling inflation.
This means that during boom periods, the slope of the S$NEER policy band is more readily adjusted upwards to curb inflation. However, during downturns with low inflation and a resultant negative output gap, the slope of the S$NEER policy band is rarely adjusted significantly.
Given that 20205’s slightly positive output gap and low inflation sits in the middle of both scenarios, we hold onto our base case of a slight reduction in the S$NEER policy slope at MAS’s Jan 25’s policy review. However, while good progress in disinflationary sets the stage for policy easing in Jan 25, the aforementioned inflationary risks from Trump indicates that a continuous easing at subsequent meetings is not promised.
Consequently, TAM base case estimates USD/SGD to stay at between levels of 1.34-1.37 in the near-term, with the possibility of treading lower if the inflationary threat of Trump tariffs are not promised earlier in the next 30 days.