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Car COE slide expected to dampen headline inflation

Latest Cat A & B premiums down; economists agree premiums will soften in months ahead, but pent-up demand could cap the slide

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With the spike in Certificate of Entitlement (COE) supply, premiums for both big and small cars fell on Wednesday - just as dealers had expected.
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WITH the spike in Certificate of Entitlement (COE) supply, premiums for both big and small cars fell on Wednesday - just as dealers had expected.

And with room for further easing in COE premiums, economists say lower car prices will continue to subtract from Singapore's already-benign headline inflation figure.

The latest bidding exercise, the second of a new quota offering 41.1 per cent more COEs in the May-to-July period, produced a mix bag of results. While COE premiums for small and big cars fell, they remained stable for motorcycles and the open category. In contrast, COE premiums for goods vehicles and buses rose.

Cat A, for cars below 1,600 cc or 130 hp, fell S$1,999 to S$66,590. Cat B, for cars above 1,600 cc or 130 hp, dropped S$2,598 to S$75,002.

Cat D, for motorcycles, slipped S$11 to S$6,501; Cat E, the open category, shed just S$3 to S$78,001.

But Cat C, the one for goods vehicles and buses, bucked the trend by rising S$1,903 to S$52,001.

Observers were split on why this was so. Some cited changes to the Carbon Emissions-Based Vehicle Scheme (CEVS), while others surmised that a firm-specific factor was behind the increase.

Given the substantial increase in COE supply, both dealers and economists had seen the drop in premiums for big and small cars coming.

Nicholas Wong, general manager of Kah Motor, noted that the number of bids had come down this time around; Cat A pulled in 540 fewer bids, and Cat B, 230 fewer.

Mr Wong added: "If fewer people bid, demand is softer, and therefore prices are softer."

Still, the fall in COE premiums wasn't as sharp as some had expected. To independent economist Song Seng Wun, this "underscores how there is still some resilience in the car market", perhaps because of firm replacement demand.

Indeed, further weakening in COE premiums is expected to be capped by underlying pent-up demand.

Mr Wong said it is hard to tell whether the fall in premiums will last: "It's very hard to say, because we don't know what price the market can take. After prices have come down, more people will come in, and that will push prices back up again."

In addition, a surge in COE quotas is expected for the rest of the year, arising from the large number of cars due for de-registration, which could mean only a moderate fall in COE premiums.

Mizuho economist Vishnu Varathan said: "Even with the supply increase, those hoping for a rapid drop (in premiums) could be disappointed because there could be pent-up demand ... The broader take-away is that any increase in supply could just be mopped up by more de-registrations. People shouldn't be looking for a tectonic shift in prices."

Even so, there is consensus that COE premiums will slip in the months ahead - which, along with softer imputed rentals, will continue to dampen overall inflationary pressures in Singapore.

The Monetary Authority of Singapore (MAS) had flagged this last month in its Macroeconomic Review, in which it said that weaker car prices could lower headline inflation "slightly" for the whole of 2015, a view shared by Mr Song.

DBS economist Irvin Seah, noting that private road transport costs make up 11.5 per cent of the entire CPI basket, said: "The weightage is actually quite heavy. So if there's going to be more downside to COE premiums - barring market demand - there would be a significant impact on CPI."

But Mizuho's Mr Varathan sees COE premiums subtracting less from headline inflation as the year goes on - even if car prices continue to soften.

He says this is because a simple average of Cat A and Cat B premiums shows that premiums have been rising every month since February - from S$65,212 in February to S$67,760 in March to S$70,295 in April and to S$71,945 in May.

"(Based on these averages), it troughed out in February, and has been climbing since then up until this (month) ...

"On a trend basis, we can say quite safely that (COE premiums) have been modestly drifting higher since the second half of 2014. So the illusion of deflationary private road transport costs is going to dissipate rather quickly in the second half, but perhaps not brutally," he said.

Still, economists were keen to stress that fluctuations in COE premiums will only show up in headline inflation. It is core inflation, the metric which strips out accommodation and private transport costs, that is the focus for monetary policy.

Singapore's consumer prices fell for a fifth straight month in March - slipping 0.3 per cent from a year ago. Economists believe that the inflation rate may turn positive only in the third quarter of this year. The Department of Statistics will release April's inflation figures the coming Monday.