Analysts see Singapore’s inflation momentum easing towards the end of the year, with both core and headline inflation moderating in May.
Singapore’s core inflation slowed to an increase of just 0.1% m-o-m in May, which translates into y-o-y inflation of 4.7% for the month, down from 5.0% in April. Stronger inflationary momentum in food, utilities and communications was offset by sharper disinflation in public transport and clothing.
Headline inflation came in below market expectations of 5.4% at a y-o-y increase of 5.1% in spite of accommodation costs remaining high, as private road transport costs continued to ease on a y-o-y basis.
The Monetary Authority of Singapore (MAS) has maintained its inflation forecasts for 2023, expecting core and headline inflation to average around “3.5-4.5%” and “5.5-6.5%” for the full year, respectively. The 2023 forecasts have taken the impact of the upcoming 1 percentage point GST hike in January 2024 into account.
Albeit gradual, HSBC Global Research economist Yun Liu says it is encouraging to see signs that core inflation has been moderating as MAS had anticipated. On a 3-month seasonally adjusted annual rate (saar) basis, she notes that core inflation has continued to dip further after experiencing a brief uptick, signalling further moderation.
The trend will also likely be better supported by favourable base effects, which will kick in from June, Liu adds.
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She notes that MAS’ definition of core inflation excludes accommodation and private road transport but includes energy inflation. “The moderation trend has been largely driven by energy disinflation, but to a lesser extent by food and services inflation.”
According to Liu, although services inflation has cooled marginally, it remains elevated due to a labour market that remains tight — job vacancies and wage growth in 1Q2023 remained substantially higher than their historic levels, fuelling continued support to consumer spending, though the latter has started to moderate from last year’s re-opening tailwinds.
Meanwhile, the trend of energy disinflation has also helped headline inflation to moderate faster than market expectations, reducing private road transport costs together with declining Certificate of Entitlement (CoE) prices after reaching record highs in April.
“That said, rental costs remain elevated, a reflection of the buoyant property market,” says Liu. “The private residential price index continued to grow over 10% y-o-y in 1Q2023, well above the average growth of 2% y-o-y before the pandemic.”
With May’s inflation numbers, she expects inflation to remain “on track” to fall within MAS’ forecast range for the year, but adds that there remains a “big question” over whether Singapore’s central bank will go the way of other central banks in resuming a policy of monetary tightening.
However, Liu says that she does not believe MAS will follow suit, as inflation has consistently been on the decline. She expects inflation to moderate further to 3.3% y-o-y in 3Q2023 and 3.0% in 4Q2023, bringing average inflation to 4.1% for the whole year — around the midpoint of the MAS’ forecast range for core inflation, as it has predicted. As such, she expects MAS to keep its policy unchanged at the October meeting.
Similarly, UOB Group Research economist Alvin Liew expects MAS to maintain the status quo for its scheduled update later this year. “While inflation concerns remained in recent months, it was also evident that the growth outlook has been also subjected to greater uncertainty and biased on the weaker side.”
He continues to expect headline inflation to average 5.0% and core inflation to average 4.0% in 2023. Excluding the 2023 GST impact, Liew expects headline inflation to average 4.0% and core inflation to average 3.0% in 2023, both still above the “standard” central bank objective of 2% inflation.
“While still maintaining our 2023 forecasts unchanged, we note that if the stickiness of core price increases persists for the next two months, then we may need to revise our core CPI forecast higher,” says Liew.
Given the stickiness of core inflation, he notes that it is too soon to expect MAS to reverse its monetary policy. “Faced with sticky inflation and a weaker growth outlook, we keep the view that the tightening cycle ended in April and MAS will maintain this pause in the next meeting in October.”
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Although it is not his base case for now, he adds that should there be an off-cycle announcement before October, he believes this will likely come from a sudden worsening in external conditions leading to a sharp growth downgrade, forcing MAS to shift to a “more accommodative policy” instead of further tightening in its next move.
Meanwhile, RHB Bank economist Barnabas Gan is keeping his forecast for Singapore's headline and core inflation slightly more positive at both 4.0% in 2023. He says that MAS has kept its dovish stance, citing downside risks to inflation stemming from a sharper-than-expected downturn in advanced economies that could induce an easing of global inflation pressures.
However, Gan notes that MAS has also cited that upside risks remain should there be “fresh shocks to global commodity prices and more persistent-than-expected tightness in the domestic labour market.” He adds that his estimate of the S$NEER monetary policy band remains strong at 1.0% above the midpoint, suggesting that a relatively strong Singdollar will cap import prices.
With May’s inflation numbers, Citi Research analyst Kit Wei Zheng has maintained his core inflation forecast for 2023 at 4.1% but nudged his headline inflation forecast to 5.4%, down from 5.5% previously — still slower than MAS expects inflation to moderate.
He now expects June’s core CPI to slow to 4.3% y-o-y, such that 2Q2023 core inflation averages 4.6%, before moderating further to average 3.5$% in 3Q2023 and 3.1% in 4Q2023. Alongside the next 1 percentage point GST hike in January 2024, Kit expects Singapore’s core and headline inflation to average 2.9% and 4.7% in 2024.
Kit holds the same outlook as the rest of the analysts that MAS is unlikely to ease its monetary policy in October, noting that a further tightening has not completely been “ruled out”. “If our forecast for core [inflation] to moderate more slowly than MAS’ expectations materialises, easing would be unlikely in October, given the primacy of inflation surprises in policy decisions,” he explains.
“Any downgrade in MAS’ headline inflation forecasts is unlikely to trigger an easing, especially at these still elevated levels [of inflation],” adds Kit.
