Analysts have largely kept their inflation forecasts for 2022 and raised their forecasts for 2023, in line with the Monetary Authority of Singapore’s (MAS) guidance to 4% for core consumer price index (CPI) and 6% for headline CPI in its Oct 14 statement.
The central bank, on Oct 14, announced that it will re-centre the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band up to its prevailing level, making the move its fifth tightening move since October 2021.
DBS estimates MAS Core inflation to come in at 4% in 2022
MAS’s re-centring of its policy band higher with no changes to the slope or width came in line with the expectations of DBS Group Research’s senior foreign exchange (FX) strategist Phillip Wee.
“According to our model, the policy band was re-centred higher by 2% (or half the width of the band), double the 1% increases at the last two policy meetings,” he writes. “Since last October, the band was lifted thrice by a total of 300 basis points (bps), and the slope steepened three times to 3% a year from 0%,” he adds.
In his report dated Oct 14, Wee is estimating that the price barometer will average 6.0% for the full year.
See also: MAS to re-centre the mid-point of the S$NEER policy band up to prevailing level
In 2022, Wee expects CPI-All Items to come in around 6%, which is at the top of MAS’s previous forecast of 5%-6%. Similarly, the strategist expects MAS Core inflation to come in at 4% for 2022, which is at the top of the original 3%-4% forecast.
“Looking ahead into 2023, the MAS sees CPI and core inflation averaging 5.5%-6.5% and 3.5%-4.5%, respectively, after factoring in the GST increase,” he writes.
“Factoring in the upcoming GST hike and elevated inflationary pressure globally, we foresee headline CPI inflation to average 6.3% in 2023, with core inflation for the full year likely to come in 4.2%,” he adds.
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However, Wee notes that the exchange rate appreciation alone “cannot be the panacea”.
“Singapore has little influence over the high global inflation from a fundamentally changed economic and political international landscape,” he says. “To avert a destabilising wage price spiral, the government encourages employers and workers to boost skills upgrading and to increase productivity to keep the country competitive.”
Going ahead, Wee believes that the MAS will become more “data-dependent” in making its policy decisions in future.
According to his model, the S$NEER, which is around 0.9% above its mid-point at the time of writing, is a “sweet spot” for market participants worried about rising inflation and weaker global growth prospects.
“In USD/SGD terms, the stronger half of the S$NEER policy band is estimated to be between 1.4090 and 1.4370,” Wee writes.
CGS-CIMB increases CPI outlook for 2023
CGS-CIMB Research economist Nazmi Idrus said that the MAS’s re-centring of the S$NEER, with no change to the slope or the width of the band was above his expectations.
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“We only predicted MAS to keep the slope of the S$NEER unchanged,” he writes in his Oct 14 report.
Idrus adds that MAS’s 2023 consumer price index (CPI) forecast, excluding the impact of the heightened goods and services tax (GST), was still high, in his opinion.
In its statement, MAS estimated that core inflation for 2023 would range from 2.5%-3.5% while headline inflation stood at 4.5%-5.5%.
“Given the downward trend in commodity prices, high base effects, and possibility a global slowdown, 2023 inflation should taper lower, in our view,” says Idrus.
As the analyst also expects potential price pressure from the property market on the back of residential property prices in the 2Q2022 growing by a 10-year high of 13.9% y-o-y, Idrus has increased his CPI outlook for 2023 to 4.5% from 2.6% previously.
Inflation to “stay elevated for longer” and persist “well into” 2023: Maybank Securities
In their report on Oct 14, Maybank Securities analysts Chua Hak Bin and Lee Ju Ye estimate that the re-centring by MAS is around 2% above the previous mid-point, similar to DBS’s estimates.
Based on MAS’s statement on Oct 14, Chua and Lee estimate that inflation will “stay elevated for longer” and persist “well into” 2023.
To be sure, the MAS expects core inflation to stay around 5% for the remaining months of 2022 and early into 2023. This is based on the domestic wage pressures arising from a tight labour market and elevated imported inflation across intermediate and final goods.
On this, Chua and Lee have kept their core and headline inflation forecasts unchanged at 4.2% and 6.2% for 2022, estimating that core inflation may peak in the 4Q2022.
“[This may be] led by lower energy, electricity and food prices, but is likely to remain elevated due to labour market pressures,” they write.
The analysts have, however, raised their 2023 inflation forecasts to 4% for core CPI and 6% for headline CPI, in line with MAS’s guidance.
“The labour market remains tight and wage cost pressures will likely persist. The wage-price spiral may be exacerbated in the coming months after the implementation of the local qualifying wages (of $1,400) in September, expansion of the Progressive Wage Model (PWM) to the retail sector in September this year and food and beverage (F&B) sector in March 2023,” write Chua and Lee.
In addition, they expect accommodation costs to continue to rise with the return of non-resident workers. The delay in property completions and possibly demand from private property owners going through the 15-month HDB wait-out period may also contribute to higher accommodation costs ahead.
To this end, Chua and Lee are expecting to see yet another tightening from the MAS at the April 2023 meeting. “[This would be done] probably via another re-centring,” they write.
“Our model suggests that the S$NEER is about +0.5% above the mid-point of the new re-centred band, with considerable room left for further appreciation,” they add. “Our FX team forecasts the USD/SGD at 1.41 in end-2022 and 1.36 in end-2023.”
MAS’s tone in latest policy statement ‘markedly more bearish’: RHB
RHB Group Research’s senior economist Barnabas Gan also sees the possibility of another policy tightening by the MAS in April 2023, similar to his peers at Maybank Securities.
This is due to the possibility of inflation remaining elevated in the quarters ahead.
“Prior to [MAS’s] decision to recentre the band, our RHB S$NEER model indicated that the S$NEER was trading at 1.8% above the mid-point,” Gan writes. “This suggested that the midpoint was lifted by a full 180 bps to its current prevailing level, a pace similar to past recentring moves (April 2022: +180 bps, July 2022: +120 bps). The current slope is perceived to be at 1.5% appreciation, while the width is estimated at 2.0%.”
In his report, Gan notes MAS’s reluctance to steepen the S$NEER slope may have stemmed from downside risks to growth in 2023. “Nonetheless, policymakers cited that inflation is expected to ease in 2023,” he adds.
“While MAS move to recentre the S$NEER band higher lifted the midpoint by an estimated 180 bps, the move remains to be less aggressive than the market’s consensus,” he continues, noting that the consensus, including RHB, were calling for policymakers to do a double-barrel tightening, which included a steepening of the S$NEER slope and a recentring of the S$NEER band.
The senior economist notes that there are three possible reasons behind MAS’s decision this time.
First, the policy effect on the real economy may not “have been fully evident” in achieving stable consumer prices as the move on Oct 14 was the fourth consecutive tightening move since October 2021.
Second, the central bank’s tone in its latest policy statement was “markedly more bearish” compared to its July statement. “[This] suggests that policymakers are increasingly concerned over growth uncertainties in 2023. We note that MAS cited that the ‘globally synchronised tightening in monetary policy’ will drag economic activity in the quarters ahead. This is compared to July’s view that ‘the global economic expansion remains broadly intact for the year’,” says Gan.
Finally, inflation from a y-o-y perspective may remain elevated, although the senior economist sees momentum as likely to ease towards the end of the year. In his report, Gan feels that inflation could have peaked in August, which translates into a full-year CPI inflation at 5.8% y-o-y against MAS’s view of 6.0%.
Off-cycles likely done for remainder in 2022: UOB
UOB’s head of research Suan Teck Kin and senior FX strategist Peter Chia see any off-cycle tightening as likely to be done for the remainder of 2022. However, the possibility of MAS tightening its policies off-cycle could still be possible in early 2023, they note.
“Singapore’s monetary policy is further into a restrictive setting after five rounds of tightening since October 2021. With the MAS pulling only one lever this time, there is still room for further tightening into 2023, especially if core inflation does not show signs of moderation,” the analysts note.
They add that MAS’s latest inflation projections are consistent with their 6.0% estimate for 2022 headline inflation and 4.2% for 2022 core inflation.
In FX, UOB’s Chia expects the SGD to remain resilient against the USD although he sees that the rates-driven USD rally has yet to peak.
“In addition, the tight correlation of the SGD to the weakening CNY continues to point to a higher USD/SGD, although its trajectory is likely to be shallower compared to other USD/Asia pairs. Overall, we reiterate our current set of USD/SGD forecasts which are at 1.44 in 4Q2022 followed by 1.45 through 3Q2023,” he says.
