MAS to tighten policy in April amidst 2.5% output gap

Analysts cite the 5% growth surge in 2025 as the primary driver for a steeper S$NEER slope.

Singapore’s robust growth in 2025 is expected to moderate this year, with rising inflation and geopolitical risks likely to prompt the Monetary Authority of Singapore to tighten policies, analysts warned.

“We keep Singapore’s full-year gross domestic product forecast at 3% for 2026, following the 5% expansion in 2025. Growth momentum is likely to stay robust, underpinned by steady external demand and healthy domestic consumption,” Barnabas Gan, group chief economist and head of market research at RHB, said.

Gan predicts that domestic demand will remain resilient, supported by steady consumption, investment and government policies. Economy will remain resilient, with around 4.5% year-on-year (YoY) growth in H1 2026, up from 4.2% YoY in H1 2025.

The analysts’ optimistic outlook stems from improving trade dynamics, strong demand for AI-related electronics, resilient manufacturing momentum, and supportive global monetary conditions.

However, Gan cautioned that by the second half of the year, GDP growth will moderate due to base effects from the strong expansion in H2 2025.

Additional risks in 2026 include the potential for an AI-driven market correction and renewed geopolitical tensions, particularly around rare-earth supply chains.

“We acknowledge that risks are largely geopolitical in nature, with a material escalation in tensions representing a tail-risk scenario. With Singapore’s FY2026 Budget set to be unveiled on 12 February, we expect the government to refresh its economic strategy, balancing long-term fiscal sustainability with targeted measures to strengthen economic resilience and support growth,” Gan said.

This sentiment is mirrored by Maybank, which expects MAS to tighten policies in April by steepening the S$NEER appreciation bias slightly.

Maybank analysts estimates that the output gap widened to 2.5% of potential GDP in 2025 from 1% in 2024.

“With growth likely to remain above trend in 2026, the output gap will likely widen and increase services and cost pressures. We think MAS will likely normalize and tighten policy earlier rather than later, to preempt a pick-up in demand-side inflationary pressures,” Maybank said.

Core inflation and headline inflation is expected to hit 1.7% and 1.6% respectively, coming in at the higher end of the MAS 1%-2% forecast range.  

Inflationary pressures are building from silicon price shocks linked to the AI boom, the end of China’s export deflation, a widening output gap in Singapore, rising industrial metal prices, geopolitical tensions, aggressive global fiscal spending, and stronger-than-expected global growth.