Circuit-breaker hit to inflation raises risk of more monetary easing
The next MAS meeting is still months away, but economists say the risk of another easing is rising
Singapore
SINGAPORE'S newly extended "circuit-breaker" period - involving tougher movement curbs to keep the coronavirus in check - should keep a lid on consumer prices this year.
And, while analysts still do not expect the central bank to pull back on monetary policy at its meeting in October - or even earlier, in a off-cycle review - some warned that the risk of a second easing in a year is climbing.
This is even as figures for March, which pre-date the two-month circuit breaker, showed inflation heading south on falling services demand. Prime Minister Lee Hsien Loong last week extended the near-lockdown, which began on April 7, to June 1.
Warning that inflation is "expected to remain subdued", the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) on Thursday disclosed that all-items inflation came in flat year on year in March - its lowest point since 2016.
Meanwhile, core inflation - an MAS metric that guides monetary policy - fell deeper into the red with a decline of 0.2 per cent as it widened from February's decade low of -0.1 per cent. Core inflation excludes accommodation and private road transport costs.
With the MAS releasing a dovish April policy decision on March 30, Brian Tan, regional economist at Barclays, told The Business Times that the central bank "may be called upon to be more flexible in the timing of its (foreign exchange) policy adjustments (in) these extraordinary times".
He conceded that his base case, for the MAS to stand pat on policy in October, "is an increasingly close call", as the economy grinds to a halt for almost the whole second quarter.
"We continue to think it is too premature to rule out further easing in October or earlier," added BofA economist Mohamed Faiz Nagutha. He argued that such a policy move would be appropriate, "as expectations of a V-shaped recovery fade".
Even though the MAS and MTI reaffirmed its forecast for all-items and core inflation to fall between -1 per cent and zero, Citi analysts said more easing "would be justified if a deeper recession and larger output gap forces yet another downgrade in MAS' core forecasts" for 2020 and 2021.
But, noting that October is months away, OCBC Bank chief economist Selena Ling hewed to a different belief. "The Covid-19 situation is still very fluid," she said, adding that monetary policy should focus on addressing liquidity and currency volatility.
In line with the MAS and MTI prediction that "safe-distancing measures and weaker labour market conditions will dampen consumer demand" though, economic watchers all agreed that the circuit breaker will take a toll on consumer prices.
This is despite an uplift in housing rentals, as accommodation inflation rose by a smidgen, to 0.5 per cent. Analysts attributed the pick-up to a rush of Causeway-crossing workers seeking a roof over their heads as Malaysia started its lockdown earlier.
United Overseas Bank economist Barnabas Gan noted that a consumer demand slowdown, as well as lower commodity prices, had already pushed inflation lower in March.
He singled out consumer discretionary goods and services, such as clothes and shoes, recreation and culture, and communications as segments showing "benign" inflation.
The global spectre of dismal oil prices also reared its head, with private transport costs slipping from inflation into a 0.3 per cent decline on lower petrol prices and parking fees.
The protracted depression in oil prices is further expected to weigh on energy-related consumer costs, said the MAS and the MTI.
Now, Singapore's longer circuit breaker and stricter curbs on the enterprises that can stay open are "likely to dampen business confidence, weigh on hiring intentions and further curbing consumer appetite for discretionary spending", said OCBC's Ms Ling.
JPMorgan economist Ong Sin Beng also said that weaker global and domestic price pressures - such as softer office and shop rents and subdued wage pressures - are expected "to persist in the coming quarters" and push down on core inflation.
