South Korea and Singapore tighten monetary policy on inflation worries

South Korea and Singapore have become the latest Asian economies to tighten monetary policy to combat inflationary risks stoked by the war in Ukraine.

The Bank of Korea on Thursday increased its benchmark interest rate for the fourth time since August to 1.5 per cent, its highest level in almost three years. The central bank made the decision as inflation in Asia’s fourth-largest economy hit 4.1 per cent in March on a year earlier, more than double the BoK’s target range and up from 3.7 per cent in February.

Separately, the Monetary Authority of Singapore, which relies on exchange rate adjustments rather than interest rates to guide monetary policy, said it would raise the midpoint for the Singapore dollar’s trading band and increase the pace at which it allowed the currency to move for the first time in more than a decade.

The city-state keeps the trading band and the composition of the currency basket on which it is based secret to deter speculation, but the Singapore dollar was up 0.7 per cent against its US counterpart at about $0.74 following the MAS announcement on Thursday.

The MAS announced the move as core inflation, which excludes accommodation and private transport, hit 2.3 per cent year on year in January-February, up from 1.7 per cent in the final three months of last year.

Singapore also upgraded its core inflation forecast for the year by 0.5 percentage points to 2.5-3.5 per cent and its all-items forecast by 2 percentage points to between 4.5 per cent and 5.5 per cent. Economists also highlighted downside risks to the city-state’s gross domestic product growth, which came in at 3.4 per cent for the first three months of 2022, just missing forecasts.

The Korean and Singaporean decisions were announced a day after the Reserve Bank of New Zealand increased rates by half a percentage point, its biggest rise in 22 years.

New Zealand’s most recent inflation figure, from December 2021, was 5.9 per cent, up from 1.4 per cent a year earlier. The country’s central bank expects inflation to peak at 7 per cent in the first half of 2022.

South Korea and Singapore cited surging costs owing to the war in Ukraine on top of the fallout from the Covid-19 pandemic.

Analysts at Fitch, the rating agency, said rising commodity prices would continue to push up inflation across Asia and probably lead to further rate increases.

“Inflation in Asian [emerging markets] . . . has generally been more subdued than in much of the rest of the world,” they wrote in a note. “Policy tightening may now be brought forward, especially if commodity-price moves were to speed up Fed tightening.”

Capital Economics, the consultancy, projected the BoK would deliver at least two more 25-basis point increases this year, which would take the country’s benchmark rate to its highest level since early 2015.

But Clara Cheong, a Singapore-based global market strategist at JPMorgan Asset Management, said Asian economies varied widely and inflation in the region had been more subdued than elsewhere.

“Generally what we’ve seen is that inflation has been relatively more benign in this part of the world due to the delayed recovery from the pandemic,” she said, adding that China would probably ease monetary policy to be able to achieve its 5.5 per cent annual growth target.

The moves by South Korea and Singapore were “unlikely to signal a wave of Asian central bank hawkishness”, she added.