Global Rate Hike Cycle Has ‘Ways to Go,’ Singapore’s Menon Says

(Bloomberg) — While central banks have slowed the pace of tightening, more interest-rate increases loom as inflation hovers above targets across the world, according to the head of the Monetary Authority of Singapore.

“Expectations by some market participants that the tightening cycle will end soon and that central banks may even starting easing are excessively optimistic,” MAS Managing Director Ravi Menon said before the Investment Management Association of Singapore on Thursday. “So long as labor shortages continue, prices will edge higher compounding the pressure on central banks to hike further later this year.”

Across the world, headline inflation has come off their peaks but core inflation and other key price measures have proved stubborn, prompting authorities including the Federal Reserve to flag the possibility of a return to bigger rate hikes just a month after slowing the pace to a quarter-point. The Fed’s preferred inflation measures unexpectedly accelerated in January and remains way above the central bank’s 2% target, a situation that plays out in other jurisdictions including Singapore.

The speed of disinflation, Menon said in his opening remarks at the IMAS-Bloomberg Investment Conference, depends on the status of labor markets, food and energy prices and China’s reopening where a “stronger-than-expected infrastructure-led rebound” could pose an upward risk to global price pressures.

The MAS, which uses the exchange rate as its main monetary tool, has tightened the policy five times since October 2021 and is due to review settings next month in the backdrop of still-hot inflation and momentum in economic activity after China’s reopening.

The extent to which demand boost from China’s reopening creates a renewed impulse to global inflation isn’t clear at this point, he said. 

“For now, China’s near-term developments appear unlikely to decisively reverse the global disinflation trend in 2023,” the MAS chief said. “However, a sharp rebound in economic activity in China on the back of robust infrastructure spending and an accelerated recovery of the property market could lead to higher global commodity prices.”

A resurgence in prices of goods and any fresh shocks to food and energy costs could interrupt the nascent trend of disinflation, he said. “Financial markets may take a while to adjust to this new regime of higher interest rates and that adjustment may not be smooth,” Menon said. Against this backdrop, investors need to build greater resilience in their portfolios, he said.

—With assistance from Joyce Koh.