Economists expect MAS to maintain monetary policy settings amid easing headline and core inflation

THE Monetary Authority of Singapore (MAS) will likely stick to the status quo at October’s monetary policy meeting, economists said after MAS and Ministry of Trade and Industry (MTI) data showed August’s inflation prints – the last to release before the meeting – cooling for the fourth straight month on Monday (Sep 25).

Headline consumer price index (CPI) slipped to 4 per cent on year from July’s 4.1 per cent, matching Bloomberg’s median forecast. This was on account of drops in core and accommodation inflation, which more than offset private transport inflation’s increase.

Core inflation, which excludes accommodation and private transport, dipped to 3.4 per cent on year in August, from 3.8 per cent in July. The reading was a tick lower than economists’ 3.5 per cent median estimate and was largely due to lower inflation for services, food, and retail and other goods.

With the material easing in August’s core CPI, MAS could reduce the Singapore dollar nominal effective exchange rate (S$NEER) slope slightly, said UOB senior economist Alvin Liew and associate economist Jester Koh.

A less restrictive monetary policy may provide some countercyclical effects to support growth recovery – but is not UOB’s base case, which is for policy to remain unchanged.

Tamara Henderson, Asean economist at Bloomberg, and Selena Ling, OCBC chief economist, agreed that expecting easing may be premature. Ling flagged persistent domestic cost pressures including increasing labour costs, while both noted that oil prices are ticking up.

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“That suggests households in the city-state still can benefit from a strong currency to lean against rising import costs,” Henderson said. “The preservation of spending power will help counter headwinds from weaker external demand over the policy horizon.”

DBS economist Chua Han Teng said that while less acute than in 2022, inflation remains high against the pre-pandemic average.

RHB’s “sticky inflation” expectation has materialised, said senior economist Barnabas Gan. He upgraded his full-year headline inflation estimate to 4.6 per cent, from 4 per cent previously, but expects MAS to stand pat.

Bank of America (BOA) Asia and Asean economist Ang Kai Wei said that MAS will “remain vigilant over inflation risks” – including any de-anchoring of expectations and wage-price spiral.

But he and Ling agreed that the five consecutive tightening moves in the run-up to April 2023 are enough to support the later stages of disinflation.

Gan said: “While the relatively rich S$NEER has continued to limit imported inflation... (there is) more headroom for S$NEER to appreciate to limit inflation further, if necessary.”

The official full-year inflation estimates remain unchanged, while MAS and MTI made several changes to their inflation outlook.

One difference is that private transport inflation is now expected to pick up in the near term due to a strong demand for cars. Previously, it was expected to moderate due to the increase in certificate of entitlement quota.

The authorities also noted that oil prices have risen since July and identified shocks to global energy prices as a new upside risk.

Economists pointed to the recent uptick in global oil prices due to supply cuts from the Organization of the Petroleum Exporting Countries and its allies. Russia and Saudi Arabia have extended oil cuts to year-end, noted Gan and Ling.

On global food prices, HSBC Asean economist Yun Liu said the benchmark Thai rice price jumped 50 per cent on year, due to erratic weather patterns and India’s rice export bans – but noted that rice’s relatively low share in the CPI basket could limit its impact.

Ling also remained wary of domestic cost pressures. Household electricity tariffs could be adjusted upwards in Q4, if energy prices remain elevated, and the cost of delivering water will likely keep rising, she said.

Chua expects core inflation to continue moderating. This is due to falling import prices, partially dampened by a strengthening Singapore dollar (Singdollar); a gradual easing of domestic labour cost pressures; and base considerations. However, risks are tilted to the upside, he added.

BOA’s Ang, noting that MAS and MTI highlighted upside risks before downside risks, said he suspects that “MAS sees inflation more to the upside than the downside”.

Gan warned that the Singdollar’s strength may be capped by commodity-linked currencies’ rally given potentially higher commodity prices. But he still expects a stronger Singdollar against most Asian currencies, “on the back of Singapore’s continued trade surplus and balanced budget mandate”.

Month on month, headline inflation was up 0.9 per cent, on account of increased accommodation and private transport costs. Core inflation nudged up 0.1 per cent, largely due to higher costs of food and services.

On the year, lower inflation was recorded for the majority of categories in August.

Services inflation declined on the back of smaller increases in holiday expenses, telecommunication services, and recreational and cultural services costs, as well as a larger decline in airfares.

On the bread and butter front, food inflation moderated as the prices of prepared meals and non-cooked food rose at a slower pace.

Retail and other goods inflation eased due to smaller price increases for household durables, and a fall in the prices of clothing and footwear.

A slower increase in housing rents caused accommodation inflation to edge down.

Meanwhile, drag from electricity and gas eased slightly as costs continued to fall but at a slower pace.

Private transport inflation picked up as car prices posted a steeper increase while petrol prices recorded a smaller decline.