Singapore made an unexpected move to tighten its monetary policy for the second consecutive time on Monday. While domestic inflation currently remains moderate, the nation has taken preemptive action to counter the risks posed by the latest surge in oil prices.

The Monetary Authority of Singapore (MAS) announced a slight increase in the slope of the Singapore dollar's nominal effective exchange rate policy band, though this adjustment is smaller than the one made in April. The width of the band and its central level were left unchanged.

Economists surveyed by Reuters last week had widely predicted that the central bank would maintain its current monetary policy stance.

Unlike most central banks, the MAS does not set interest rates. Instead, it manages monetary policy by controlling the Singapore dollar's exchange rate. The currency is pegged to an undisclosed basket of trade-weighted currencies and is allowed to fluctuate within an undisclosed policy band.

In its statement, the MAS noted: "External uncertainties remain elevated. This modest adjustment to the policy stance is a continuation of the tightening measures implemented in April."

Selena Ling, Head of Research and Chief Economist at OCBC Group, said in an interview: "The market consensus was for the MAS to hold policy steady this time, so this adjustment has caught most market participants off guard." She added that two consecutive tightening moves signal the MAS is not taking imported inflation lightly.

Singapore's core inflation, which excludes accommodation and private transport costs, edged up to 1.6% in June from 1.4% in May, approaching the lower end of the MAS's 1.5%–2.5% forecast range for this year. Overall inflation stood at 1.9%.

Analysts at BMI, a Fitch Solutions company, said that while transport fuel prices have risen sharply since the outbreak of the US-Iran conflict, weaker services inflation—particularly in healthcare, communications, and education—has offset much of the upward price pressure.

The research firm noted: "There is typically a lag in the transmission of imported cost pressures to overall consumer prices, so we still expect inflation to rise in the coming months."

OCBC forecasts that Singapore's overall and core inflation will rise to around 2.5% and 2.3% respectively in the near term, with inflation not expected to fall below 2% until the second half of 2027.

Singapore relies almost entirely on imported energy, making it highly vulnerable to spikes in oil prices.

Brent crude oil climbed back above $100 per barrel last week following attacks on two Saudi oil tankers by the Houthi group in the Red Sea. Market concerns over supply risks, which had eased somewhat after a Middle East ceasefire deal collapsed, have been further reignited by these attacks.

Benefiting from a surge in electronics exports driven by artificial intelligence demand, Singapore's economy has so far withstood the impact of geopolitical turmoil.

Singapore's gross domestic product grew by 5.7% year-on-year in the second quarter, exceeding the median forecast of 5.5% from a media survey and significantly outpacing the government's full-year growth forecast range of 2%–4%.

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Editor: Jiang Xuesi