March CPI data underscores MAS move in mid-April easing

Singapore

THE inflation data for March throws further light on the rationale behind Singapore's central bank's surprise easing of monetary policy in mid-April, said economists, as they look for more signs that may prompt a second change in monetary policy.

"The next easing move will involve a re-centring lower of the S$NEER (Singapore dollar nominal effective exchange rate) policy band, if downside risks to Singapore's growth and inflation escalate," wrote ANZ.

The consumer price index (CPI) for all items eased further to -1 per cent in March, from February's -0.8 per cent, said the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) in a joint release on Monday. This was due to a "significant decline in private road transport cost".

At its 17th straight month of decline, March's softening prices would make it the longest period of decline on record, and the steepest fall in recent months.

The data has even prompted a bank to lower its inflation forecast for 2016. "We now think that headline inflation will average -0.8 per cent in 2016 from +0.8 per cent previously," wrote UOB.

This soft print helped paint a clearer picture of why the MAS decided to flatten the Singapore dollar policy band two weeks ago, said economists.

"Despite the fact that core inflation is expected to remain positive, it is likely to fall below expectations and below the central bank's target of 2.0 per cent in the medium term," wrote DBS senior economist Irvin Seah. "This explains the MAS's move to switch to a zero appreciation S$NEER path in the recent policy meeting."

The "CPI data has likely been factored into MAS's decision on April 14 to flatten the S$NEER slope", wrote Kit Wei Zheng, economist at Citi.

Low oil prices were a big factor that guided the MAS in its easing move two weeks ago, said economists. It had said that as a result, "the increase in core inflation will be milder than earlier expected".

But with oil prices now slowly inching back up, economists are now looking towards future data releases to piece together the full picture of how soft growth and inflation have been.

Core inflation - which excludes accommodation and private road transport costs - was at 0.6 per cent in March, slightly higher than February's 0.5 per cent. This was due to higher food prices, said the MAS and the MTI.

Labour market data is thus a crucial missing piece of how soft growth prospects are, said economists.

The Manpower Ministry will issue the advance labour market report for the first quarter of this year on Thursday.

"The MAS changed its stance in April due to its view on labour market tightness," said Joseph Incalcaterra, economist at HSBC. "Accordingly, it is important to look out for employment indicators and broader economic growth, particularly in the more labour intensive industries."

ANZ economist Ng Weiwen also said that this week's Federal Open Market Committee (FOMC) meeting in the United States will be important to gauge whether the MAS will seek to change its policy stance again.

"If it's a dovish Federal Reserve that we'll see, interest rates will stay low. MAS will thus be prompted to ease again, given that growth will be sub-par," he said.