SINGAPORE – The United States central bank’s reasons for lifting its benchmark rate by a quarter percentage point on Sept 16 sounded much like what the Monetary Authority of Singapore (MAS) said in July when it tightened its policy stance for the second time in a row.
By raising its federal funds rate for the first time since 2023, the Federal Reserve communicated that the economy was strong enough to absorb a tighter monetary policy aimed at bring down further gains in inflation, amid spiking energy prices.
MAS – which uses the local currency to fight inflation – on July 27 increased the rate of appreciation of the trade-weighted Singapore dollar, building on a similar move in April, to ward off the risk from a surge in energy prices due to the Iran war and robust investment growth at home fuelling inflation.
The policy alignment shows that economies, big or small, are in the same boat when it comes to basic economic issues.
Following a period of policy divergence early this year, a shared macroeconomic shock – mainly the energy price spikes fuelled by the Middle East conflict – has forced central banks worldwide to uniformly prioritise fighting inflation over supporting economic growth.
The Fed move also follows a 25 basis-point rate increase by the European Central Bank – its second hike this year. The Bank of Japan also raised its benchmark interest rate by a quarter percentage point in June.
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, said: ‘’Geopolitical fragmentation, energy security, larger fiscal footprints, supply-chain duplication, and the capital intensity of the AI investment cycle all point towards a world in which inflation is likely to remain more persistent.’’
Hence, the Fed has resumed tightening, without meaningfully restricting economic growth.
As long as investments required for data centres, semiconductors, power, grids, infrastructure, and financing remains strong, the US economy may be able to absorb higher rates more easily, said Ahmed.
Higher interest rates are not going to reopen the Strait of Hormuz – that used to supply a fifth of crude oil to the world. The closure of the waterway because of the Iran war has resulted in sustained gains in energy prices, feeding into the costs of making and shipping goods worldwide.
But steeper rates can make access to money, or the borrowing cost, more expensive – diminishing other sources of inflation such as mortgages, credit cards and auto loans. It may also bring some discipline to investment growth – both in capital markets and the real economy.
‘’Tighter monetary policy globally will weigh on real demand and hence export volumes,’’ said Sheana Yue, senior economist at UK-based research firm Oxford Economics.
She said higher energy prices could provide some offset to Singapore’s nominal exports given its role as a regional refining and re-export hub.
‘’At the same time, continued AI-related demand should provide a more durable source of support for electronics and semiconductor exports.’’
US stocks fell after the Fed rate hike because higher interest rates mean a higher discount on stock valuations.
However, stocks sensitive to AI will likely to be the exception to this rule.
James Ooi, market strategist at Tiger Brokers in Singapore, said: ‘’The stronger growth and higher profit margins of technology companies relative to traditional sectors could help offset the impact of higher rates.
‘’This could ultimately make tech stocks a preferred asset class in a flight to growth and quality.’’
But the question remains on the outlook for monetary policy, especially since the recent developments in the Middle East show that energy prices are not coming down significantly enough any time soon.
Hence, going forward more rate hikes – or a tighter monetary policy – should be expected.
MAS’s main policy tool is the Singapore dollar because in a small and open economy such as the Republic – where gross exports and imports of goods and services are more than 300 per cent of GDP and almost 40 cents of every dollar spent domestically is on imports – the exchange rate has a much stronger influence on inflation than interest rates.
That leaves Singapore’s domestic interest rates to follow the global tide, even as they remain lower than most of their peers worldwide.
Still, the higher inflation forecast that usually accompany MAS’s tighter monetary policy stance have its own impact.
In April, MAS raised its forecasts for core inflation – which excludes private transport and accommodation to better reflect household expenses – to a range of 1.5 per cent to 2.5 per cent, from a previous estimate of 1 per cent to 2 per cent.
In July, MAS said inflation – much higher than their historical average of 1.5 per cent – would only ease more discernibly in the second half of 2027 as global energy prices gradually moderate.
With bond yields rising worldwide, especially the 10-year and 30-year US Treasury yields recently hitting above 5 per cent – the highest levels since 2007 – the Singapore overnight rate average (SORA), that is used as a benchmark for much of lending, has been on the rise.
The compounded one-month SORA that started the year at 1.1779 per cent stood at 1.2571 per cent on Sept 15. The three-month SORA has also risen from 1.1797 per cent to 1.1984 in the same period.
Since MAS has been ahead of the curve, the latest Fed hike is unlikely to add new impetus to rates in Singapore.
However, Fed’s policy guidance that it may raise rates at least one more time this year and US market expectations of three more such moves may start to have a hawkish impact on the outlook of monetary policy and interest rates in Singapore.
Given the global policy alignment on inflation being the overriding concern, another tightening move by MAS is already expected by some analysts.
The latest data on Singapore’s exports reinforces the bullish view on economic growth – already estimated by the Ministry of Trade and Industry to grow at a stellar pace of 4.5 per cent to 5.5 per cent this year.
Figures released by Enterprise Singapore on Sept 17 showed non-oil domestic exports rose 46.2 per cent in August, extending July’s 24.1 per cent expansion, as electronics shipments continued to surge due to AI-related demand.
Oil prices that were averaging at around US$80 per barrel in July are now above US$100.
However, DBS Bank’s chief economist Taimur Baig said the path to further rate hikes could easily get undone.
‘’A large market selloff, a public debt crisis, an AI-related cataclysmic event, slippage in the labour market, or a major worsening of the geopolitical environment could force the Fed to shift its focus from inflation to economic stablisation,’’ he said.
‘’Bottom line, the about-turn by what had seemed like a dovish Fed Chair just a few months ago underscores the challenges embedded in this cycle.’’
