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September core inflation at new 3-year low; MAS may go down 'zero-slope' next, say analysts

Consumer price increases stayed largely flat in September, a week after the Monetary Authority of Singapore (MAS) moved to ease monetary policy on the back of subdued inflation.

THERE were few surprises in September’s consumer price data, which came out on Wednesday, a week after the Monetary Authority of Singapore (MAS) tweaked its monetary policy amid subdued inflation.

Still, private-sector watchers would not rule out another loosening of the reins at the central bank’s next policy review in April next year.

Headline or all-items inflation was at 0.5 per cent in September, unchanged from the month before, according to figures from the MAS and Ministry of Trade and Industry (MTI).

Meanwhile, core inflation – an MAS gauge that excludes accommodation and private road transport costs – eased to 0.7 per cent, from 0.8 per cent in August. The reading is the lowest since March 2016 and came in a shade below the estimate of 0.8 per cent in a Bloomberg poll of private economists.

Barclays Bank economist Brian Tan, who was right on the money in his forecast for the September numbers, said that his base case was for the MAS to leave currency policy untouched at the next meeting, but added that there are still risks for a “zero-slope” cut that halts the rise of the Singdollar.

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In a joint statement with the MTI, the MAS reiterated its monetary policy statement outlook of Oct 14, when it slowed the pace of Singapore dollar appreciation – the first easing in three years – on “muted” inflationary pressures and tepid gross domestic product (GDP) growth.

With its earlier policy statement, the MAS had already cut its full-year projections for headline inflation from 0.5 per cent to 1.5 per cent, to “around 0.5 per cent”.

It also guided for full-year core inflation at the “lower end” of a range between 1 per cent and 2 per cent – down from an earlier indication for the “lower half” of the forecast range. MAS expects core inflation to  average 0.5 to 1.5 per cent in 2020.

Core inflation now stands at 1.2 per cent for the year so far, with the MAS and MTI affirming that that wage growth will come in lower in 2019 and 2020 as “labour market conditions are softening slightly”.

JPMorgan analyst Ong Sin Beng, who expects milder inflation in 2020 than the MAS has indicated, said: "We expect the path of inflation will remain benign, reflecting a combination of weak global price pressures and also subdued domestic prices pressures, reflected in soft commercial and retail rents as well as limited wage pressures."

Nomura research analysts Euben Paracuelles and Charnon Boonnuch agreed with the MAS core inflation projection for 2019, which they said “reflects weak demand-pull pressures as rising external headwinds continue to have negative spillover effects on the labour market”.

“We expect weak demand-pull pressures to persist into 2020 as growth headwinds remain strong,” the Nomura analysts added.

Citi analysts Kit Wei Zheng and Ang Kai Wei also noted that the MAS has signalled, in what they called an “unprecedented dovish forward guidance”, that it could again intervene - especially as the Singdollar’s nominal effective exchange rate “has proved remarkably resilient” despite central bank efforts.

“Overly aggressive forecasts for a rebound in GDP and inflation could be construed as lowering the hurdle for downside data surprises, and thus paving the way for a shift towards a zero slope in April 2020,” they added.

The International Monetary Fund separately cut its growth estimates for Singapore, also on Wednesday, to 0.5 per cent in 2019. It expects subdued growth of 1 per cent for 2020.

The MAS and MTI data showed that core inflation was cooler in September than the month prior on the back of lower services inflation and a larger fall in electricity and gas prices.

The price increase for services dipped to 1.4 per cent, from 1.7 per cent in the month before, as airfares and telecom services fees dropped.

The roll-out of the national Open Electricity Market also pushed household energy costs down again, as expenses fell by 8.3 per cent, steeper than the 7.8 per cent in August.

Otherwise, retail goods costs ticked down more gradually in September – slipping by 0.8 per cent, against 1.5 per cent in August, as a decline in the prices of clothes, shoes, medical products and telecom equipment moderated. Meanwhile, food inflation was flat at 1.6 per cent.

On the roads, a larger slump in pump prices and smaller increase in Electronic Road Pricing tolls together offset rising car prices, so private road transport costs inched up by just 0.5 per cent, compared with 0.6 per cent in August. Housing costs dipped by 0.5 per cent in September, against a 0.7 per cent drop in the month before, on a more gradual slide in rents.

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