SINGAPORE — Singapore's central bank unexpectedly tightened monetary policy on Thursday (Oct 14), saying the move would ensure medium-term price stability amid mounting cost pressures caused by supply constraints and the global recovery.

The city-state joins a group of economies that have begun to dial back heavy pandemic-era monetary stimulus, as the threat of inflation outweighs the growth risks posed by the coronavirus.

The Monetary Authority of Singapore (MAS) manages monetary policy through exchange rate settings, rather than interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed band.

It adjusts its policy via three levers: the slope, mid-point and width of the policy band, known as the Nominal Effective Exchange Rate, or S$NEER.

MAS said on Thursday it would raise slightly the slope of the policy band, from zero per cent previously. The width of the band and the level at which it is centred will be unchanged, it said.

"This appreciation path for the S$NEER policy band will ensure price stability over the medium term while recognising the risks to the economic recovery," MAS said in its statement. It said core inflation is expected to rise to 1–2 per cent next year, and close to 2 per cent in the medium-term.

It was the first tightening since October 2018.

Raising the slope of the policy band effectively increases the value of the local dollar in the trade-reliant economy, in theory making imports cheaper and exports more expensive.

For 2021, MAS expects core inflation to be near the upper end of the 0–1 per cent forecast range. The key price gauge rose by the fastest pace in more than two years in August.

MAS expects growth in the Singapore economy to remain above trend in the quarters ahead, with output likely to return to around its potential in 2022.

"At the same time, external and domestic cost pressures are accumulating, reflecting both normalising demand as well as tight supply conditions," it said.

Separate preliminary data on Thursday showed Singapore's economy grew 6.5 per cent in the third quarter, broadly in line with economists' forecasts.

MAS said GDP growth was expected to be 6-7 per cent this year and register a slower but still-above trend pace in 2022.

The Singapore dollar jumped about 0.3 per cent after the announcement to hit a three-week high of S$1.3475 per dollar.

Bank of Singapore analyst Moh Siong Sim said the shift was a "hawkish surprise”, but modest enough to keep a lid on the currency.

"It's starting baby steps towards policy normalisation, but makes sense given rising global inflation backdrop," he said.

Eleven of 13 economists polled by Reuters had forecast MAS would keep its policy unchanged, while only two had expected a slight tightening.

"The economic and inflation assessment sounds definitely more sanguine for 2022 and it looks like they are focusing on cost pressures including labour costs, both domestic and imported," said Ms Selena Ling, head of treasury research & strategy at OCBC bank.

"Also surprising is that they have dropped all the caveats about downside risks apart from a brief phrase on the emergence of a vaccine-resistant virus strain or severe global economic stresses."

Singapore, which is recovering from last year's record recession brought on by the Covid-19 pandemic, is beginning to re-open its borders with 84 per cent of its population fully vaccinated against the virus.

"I think there's a 50-50 chance MAS will also tighten (in April), because I think they are doing a very slow and gradual process of tightening so they may tighten slightly again," said Mr Jeff Ng, an economist at HL Bank. REUTERS