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Singapore core inflation at its lowest in 5 years

But no change in monetary policy seen, since drivers of benign inflation are policy-induced, transient
Tuesday, May 26, 2015 - 05:50
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April might have become part of the longest consecutive period of declining prices since 2009, and registered the lowest core inflation reading in five years - but neither will change the fundamental outlook on inflation of the Monetary Authority of Singapore (MAS).

Singapore

APRIL might have become part of the longest consecutive period of declining prices since 2009, and registered the lowest core inflation reading in five years - but neither will change the fundamental outlook on inflation of the Monetary Authority of Singapore (MAS).

After all, April's lower-than-expected inflation rates were due to transient factors, such as sharper price declines in oil-related items and a moderation in services inflation. The softer rental market and weaker Certificate of Entitlement (COE) premiums also remained a drag on headline inflation, as expected.

In year-on-year terms, overall inflation eased to -0.5 per cent in April from -0.3 per cent in March. Core inflation, which strips out the costs of accommodation and private road transport, fell to 0.4 per cent in April, compared to 1 per cent the month before.

Both inflation readings came in weaker than expected, with overall inflation remaining in negative territory for the sixth straight month. For headline inflation, the median forecast of 17 economists polled by Bloomberg, before the Department of Statistics released the data on Monday, was 0 per cent; the five polled on core inflation had anticipated a higher rate of 0.7 per cent.

Economists said their forecasts missed the mark in part because of the steep drop in the cost of oil-related items. This fell by 11.7 per cent in April from March's 7.9 per cent decrease, as electricity tariffs were reduced further owing to lower global oil prices.

Services inflation, too, came in weaker than analysts had forecast. It eased to 1.1 per cent from 1.5 per cent a month earlier, largely led by a fall in holiday travel costs and the waiver of national examination fees announced in Budget 2015.

Said Barclays economist Leong Wai Ho: "One factor that influenced (cheaper holiday costs) was the airlines' decision to take off fuel surcharges. That would have reduced the costs of package tours too."

Meanwhile, food inflation, was stable at 2.1.

As in previous months, accommodation and private road transport costs exerted a drag on headline inflation. Accommodation was 2.5 per cent lower in April, extending the 2.2 per cent decline in the previous month and reflecting the soft housing rental market. Private road transport costs fell by a more modest 2.1 per cent in April, compared to March's 4 per cent drop. This was largely due to the smaller correction in COE premiums on a year-ago basis.

In joint comments, MAS and the Ministry of Trade and Industry (MTI) said: "Although underlying cost pressures stemming from the tight labour market remain, the pass-through to consumer prices is expected to be tempered in the near term by the moderate growth environment. At the same time, the suite of budgetary measures announced recently will help to alleviate some of the price pressures faced by consumers."

They also reiterated official forecasts for 2015: headline inflation is projected to average -0.5 to 0.5 per cent, and core inflation, 0.5 to 1.5 per cent.

Even though April's core inflation rate of 0.4 per cent was below the government's forecast range, economists agree that there is still a high hurdle for monetary policy easing.

Said Nomura economists in a research note: "Despite inflation edging down toward the lower bounds of the MAS's 2015 forecast ranges ... this is consistent with (its) forecast that inflation could ease further before rising towards the end of 2015 and into 2016. MAS also noted that a number of other budgetary measures, including a reduction of the concessionary foreign domestic helper levy and a one-year road tax rebate, would keep inflation low. As these administered price changes mask the true degree of core inflation pressures emanating from labour market tightness, MAS is likely to tolerate inflation falling to slightly below its forecasts."

Indeed, MAS and MTI pointed out that such budgetary measures come on top of the increase in medical subsidies, "which will continue to dampen inflation on a year-ago basis until early 2016".

Since the factors driving down inflation are either policy-induced or transient, economists say that it is misguided to think that a change in monetary policy is on the horizon. Said Mizuho economist Vishnu Varathan: "Bets that the MAS will shift to dovish gears on April's inflation slip miss the wider point and trend, and in any case are premature, if not simply wide off the mark."

Added Barclays's Mr Leong: " Overall, despite the weaker-than-expected print, the dominance of one-off administrative factors behind the fall in core inflation suggests MAS is unlikely to be overly concerned by the print ... (We) believe additional changes to the S$NEER (Singapore dollar nominal effective exchange rate) policy band would occur only in the event of a significant darkening in the growth outlook."

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