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Latest inflation report divides views on further Sing $ easing

Core inflation, which guides MAS policy, rises to 1.3% in Feb even as headline inflation stays negative

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Singapore's latest inflation numbers have left the market no clearer on how the central bank will move in April, when it next meets to review its monetary policy stance.


SINGAPORE's latest inflation numbers have left the market no clearer on how the central bank will move in April, when it next meets to review its monetary policy stance.

Headline inflation remained in negative territory at -0.3 per cent in February - a touch higher than January's reading of -0.4 per cent - again due to drags from both accommodation and private road transport costs.

Still, the slight edging up in overall inflation was attributed to a stronger increase in food prices and services fees. This prompted core inflation, which excludes the costs of accommodation and private road transport, to rise to 1.3 per cent last month compared to one per cent in January.

February's larger divergence between headline and core inflation has left private-sector economists divided on whether the Monetary Authority of Singapore (MAS) will ease policy further next month.

Some believe the central bank will re-centre the S$NEER (Singapore dollar nominal effective exchange rate) policy band downward, citing lower inflation risks and weaker growth prospects. Others say MAS has already factored such risks in, and hence expect no change to be made to the policy band's midpoint, slope, or width.

February's consumer price index (CPI) release came in slightly under expectations. The median forecast of 18 economists polled by Bloomberg before the Department of Statistics (DOS) released the data on Monday was for a -0.2 per cent year-on-year headline inflation figure.

Just as in recent months, falling accommodation costs and private road transport costs exerted a significant drag on overall inflation. Extending their 1.9 per cent fall in January, accommodation costs declined by 2.1 per cent in February, reflecting the soft housing rental market. Private road transport costs were 5.8 per cent lower, following January's 5 per cent drop. This was due to the sharper correction in COE (Certificate of Entitlement) premiums.

Stripping these out, however, core inflation came in higher at 1.3 per cent. MAS and the Ministry of Trade and Industry (MTI) said in joint comments that this reflected stronger food and services inflation.

Food prices rose by 2.5 per cent compared to January's 2.2 per cent increase - a result of the seasonal pick-up in demand during the Chinese New Year period. Services inflation increased to 1.5 per cent from 1.2 per cent a month ago, largely led by the higher cost of holiday travel during the festive season, and the rise in tuition & other fees.

With February's inflation figures released, there are now two distinct camps among private-sector economists: Those who believe monetary policy easing will occur in April, and those who see no impetus for that. Economists from ANZ, Bank of America Merrill Lynch (BOAML), Credit Suisse, DBS and UOB are part of the former, while those from Barclays, Citi, HSBC, Mizuho and OCBC represent the latter.

Those who expect a further easing - following MAS's off-cycle slope reduction on Jan 28 - say the floor of the policy band has been persistently tested in recent weeks, necessitating MAS's intervention to support the Singapore dollar.

"Not re-centering the S$NEER band in April would result in a further depletion of reserves," said BOAML's Chua Hak Bin, echoing UOB economist Francis Tan's view.

Dr Chua and Credit Suisse's Michael Wan also believe that a weak inflation outlook and soft growth prospects will prompt further easing.

But other economists pointed out that MAS's primary objective is to ensure price stability as a basis for sustainable economic growth. With both headline and core inflation comfortably within the official forecast ranges of -0.5 to 0.5 per cent and 0.5 to 1.5 per cent respectively, Barclays's Leong Wai Ho and Mizuho's Vishnu Varathan do not see an easing by MAS next month.

They also put less weight on the negative headline inflation figure - which has come under zero for four months now - since they say the central bank takes its cue from core inflation, and not the overall number.

Said Mr Leong: "I don't see core inflation slipping anywhere below 1 per cent. It is our view that there is no deflation, no disinflationary concerns for the bulk of the line items in the CPI basket."

Added Mr Varathan: "(The data) doesn't provide any new evidence for MAS to take further action . . . MAS doesn't pander to short-term growth, and it has already factored in the weaker inflation outlook."

While HSBC's Joseph Incalcaterra also forecasts no change in policy in April, he sees risks that the MAS may widen the S$NEER band - which is what Citi's Kit Wei Zheng is expecting.

"Band widening is not easing, but could be undertaken to accommodate increased economic uncertainty from divergences in the global outlook, and increased market volatility and a strong US dollar from persistent divergences in global monetary policy," said Mr Kit.