MUFG’s Lloyd Chan notes that the Monetary Authority of Singapore (MAS) delivered a second consecutive tightening by slightly increasing the Singapore Dollar (SGD) Nominal Effective Exchange Rate (NEER) slope, reinforcing SGD resilience. Despite global uncertainty and high US yields, Chan highlights that MAS’s modest but hawkish stance should keep the SGD supported and expects USD/SGD to trend lower over the medium term, with external US Dollar (USD) dynamics the key risk.

MAS tightening underpins Singapore Dollar

"MAS surprised markets by delivering a second consecutive tightening, raising the rate of appreciation of the S$NEER policy band by a very slight amount, while leaving the width and centre unchanged. Notably, the adjustment was explicitly described as being smaller than the move in April, signalling that while policy tightening was warranted, MAS believes only a measured response is needed at this stage. We estimate the slope of S$NEER has increased by 25bps to 1.25% per annum."

"While the magnitude of the move was modest, the decision itself is significant. It confirms that MAS is increasingly concerned about the persistence of imported inflation pressures and believes the economy remains strong enough to absorb further policy tightening."

"The growth backdrop remains strong. Following GDP growth of 6.3%yoy in Q1 and 5.7%yoy in Q2, MAS now expects the positive output gap to widen in 2026 as the economy continues to expand above trend. Importantly, growth is not only confined to tech-related sectors, with broad-based strength seen across construction and financial services."

"Nevertheless, domestic inflation pressures remain contained. Unit labour cost growth continues to moderate, productivity gains remain healthy and there is still little evidence of broad-based second-round inflation effects. This distinction explains why the tightening was deliberately modest."

"SGD remains sensitive to high US yields and any significant escalation in geopolitical tensions that could drive safe haven flows into USD. But the latest policy move, albeit modest, reinforces a hawkish policy bias and should keep SGD well supported. We continue to expect USD/SGD to trend lower over the medium term, although external USD dynamics remain the key near-term risk."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)