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Quick Takes: Singapore's inflation readings pose high hurdle for monetary easing, say economists

Monday, May 25, 2015 - 15:03
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Singapore's headline and core inflation came in weaker than expected in April, at -0.5 per cent and 0.4 per cent respectively. This marks the sixth month that overall inflation is in negative territory.

SINGAPORE'S headline and core inflation came in weaker than expected in April, at -0.5 per cent and 0.4 per cent respectively. This marks the sixth month that overall inflation is in negative territory.

Here's what economists had to say about the latest readings:

Barclays economists Leong Wai Ho and Bill Diviney note that the electricity tariff cuts drove core inflation to a five-year low:

"The principal drag on both core and headline inflation was the expected fall in electricity tariffs, which is linked to the fall in oil prices. The main factor behind the miss in headline inflation relative to our forecast was renewed weakness in the accommodation category, with soft housing rentals continuing to weigh in. A further drag we had not factored into our core inflation forecast was the one-off waiver of national examination fees, as well as the lagged pass-through of oil to lower holiday costs."

Citi economist Kit Wei Zheng thinks that the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry's (MTI's) joint statement sounds "more dovish given budgetary measures":

"As in March, MAS and MTI noted external price developments would remain benign as pass-through of domestic cost pressures would be 'tempered' by a moderate growth environment. Reference to a 'tight labour market' was maintained, although we are more cautious given (the) sharp fall in employment growth to just 300 in Q1 2015, (the) slowest since 2Q09. Compared to (the) March statement, the April statement also cited an additional near term disinflationary drag from budgetary measures, which is only expected to dissipate in 2016."

Going forward, ANZ economists Weiwen Ng and Glenn Maguire believe that weaker Certificate of Entitlement (COE) premiums, along with softer imputed rentals, will put a lid on headline inflation in the coming months. However, they note that core inflation will be key to monetary policy decisions:

"Core inflation is the more important measure from a policy perspective. While core inflation has undershot the lower end of market's expectations in this instance, we still think that the hurdle for monetary easing is still high even if inflation does not pick up materially."

Still, Citi's Mr Kit added: "Despite MAS setting a high hurdle for policy action, further declines in core to below 0.5 per cent could reignite market speculation of easing in October. Details on Q1 job data (available in late June) should be closely watched, as it would shed light on the extent to which the fall in Q1 employment creation reflects softening labour demand and therefore risks to MAS's hawkish vigilance over underlying cost pressures."

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