Singapore holds monetary policy as economic growth moderates

Singapore’s central bank has left monetary policy unchanged as investment in artificial intelligence continues to support economic growth, while rising import costs and international uncertainty complicate the outlook for inflation.

The Monetary Authority of Singapore announced on 14 October that it would maintain the rate of appreciation of the Singapore dollar nominal effective exchange rate policy band.

It also left the width and central level of the band unchanged, preserving the settings introduced following a modest tightening in July.

Unlike central banks that principally use short-term interest rates to influence economic conditions, Singapore manages monetary policy primarily through its exchange rate.

This approach reflects the importance of international trade to the city-state’s economy. Allowing the Singapore dollar to appreciate gradually can help contain imported inflation by reducing the local currency cost of products purchased from overseas.

The decision follows official estimates showing that Singapore’s gross domestic product increased 5.4% year on year during the third quarter of 2026, moderating from 6.2% in the preceding quarter.

On a seasonally adjusted quarter-on-quarter basis, the economy expanded 1.1%, compared with 1.5% during the second quarter.

Technology-related industries continued to provide an important source of growth, supported by international demand for AI products and investment in additional production capacity.

Construction, financial services, and real estate activity also remained firm, while consumer-facing sectors experienced weaker conditions.

The central bank expects economic activity to continue expanding steadily in the coming quarters, with strong orders for technology products supporting near-term output.

However, it anticipates that exceptional AI-related growth will moderate during the second half of 2027, while tighter international financial conditions could affect demand.

The policy decision therefore reflects a balance between relatively resilient economic performance and the risk of further price pressures.

Import costs complicate the outlook

Singapore’s core inflation rate increased to 2.1% during July and August, compared with 1.5% in the second quarter.

Higher import costs have been passing through to a broader range of goods and services, including electricity, gas, and transport.

Food inflation increased to 2.2% from 1.9%, reflecting accumulated cost increases and pressure on international agricultural supply chains.

At the same time, stronger government subsidies for healthcare and increased competition in telecommunications helped moderate inflation in some service categories.

The monetary authority expects core inflation to average between 1.5% and 2% during 2026, with headline inflation around 2%.

For 2027, both measures are forecast to average between 1.5% and 2.5%, with inflation expected to ease more noticeably from the middle of the year.

These projections remain sensitive to international energy prices, food supply conditions, and the strength of global technology investment.

A sustained increase in imported costs could maintain inflation at higher levels than anticipated, while a sharper reduction in AI-related spending could weaken growth.

Singapore’s position as a regional centre for finance, corporate headquarters, logistics, and professional services makes its economic performance relevant to businesses operating throughout Southeast Asia.

Currency movements affect imported goods costs, the value of international earnings, and financial arrangements between multinational subsidiaries.

The strength of technology-related activity also provides an indication of how global investment in artificial intelligence is influencing economic performance across Asian markets.

However, the benefits are uneven. Industries closely connected to computing infrastructure have experienced stronger demand than businesses dependent on domestic consumers.

Singapore’s government is expected to publish updated economic growth forecasts for 2026 and 2027 in November, providing further information about the likely contribution from individual sectors.

The central bank’s decision maintains the existing exchange-rate policy while recognising that stronger technology investment, elevated import costs, and slower expected growth will continue to influence economic conditions.