Economists expect raised inflation forecast, MAS policy tightening in April on war-led cost pressures

[SINGAPORE] Many private-sector economists expect the Monetary Authority of Singapore (MAS) to raise its full-year inflation forecasts and tighten monetary policy in April, after the authorities flagged on Monday (Mar 23) that prices are likely to increase, particularly in the wake of conflict in the Middle East.

In February, core inflation, which excludes accommodation and private transport, accelerated to 1.4 per cent – a 14-month high – from January’s 1 per cent.

This was largely due to higher inflation in services, food, as well as retail and other goods, partly reflecting Chinese New Year-related seasonal effects, MAS and the Ministry of Trade and Industry (MTI) said. The holiday fell in January last year, but in February this year.

Meanwhile, headline inflation cooled to 1.2 per cent in February from January’s 1.4 per cent, as lower accommodation and private transport inflation more than offset higher core inflation.

Inflation trends across consumer price index categories were mixed in February.

Anticipating an upgrade

In their latest inflation report, the authorities maintained the official forecasts for core and headline inflation at 1 to 2 per cent, but flagged several factors that will likely push prices up.

The report’s comment that MAS is “assessing recent developments and will provide an update to the inflation outlook in the April monetary policy statement” suggests an upcoming upward revision to the current forecasts, economists agreed.

Noting that they recently hiked their 2026 core inflation forecast to 1.9 per cent (from 1.7 per cent) and headline inflation to 1.8 per cent (from 1.6 per cent) because of the impact from the Middle East conflict, Maybank economists Chua Hak Bin and Brian Lee said MAS will likely raise its inflation forecast to 1.5 per cent to 2.5 per cent in April.

Barclays raised its own 2026 full-year core inflation forecast to 1.5 per cent, from 1.2 per cent.

Bank of America (BOA) Asean economist Ang Kai Wei, and India and Asean economist Rahul Bajoria noted that the authorities now foresee imported cost pressures “picking up in the near term” on account of rising energy prices due to the Middle East conflict, as opposed to “should remain constrained” previously.

Edward Lee, chief economist and Jonathan Koh, economist at Standard Chartered Bank (StanChart) highlighted “slightly hawkish” tweaks to the inflation report.

They pointed to “nuanced but seemingly slightly more firm wording” where MAS and MTI said unit labour cost growth “is likely to edge higher” this year, versus “should edge higher” previously.

They also noted that MAS said private consumption demand “should remain steady”, less firm wording compared with “is likely to remain steady”, used before.

Climbing costs

The BOA economists said that besides the latest guidance, “clearer signs of more generalised price pressures are emerging, which at the margin could lead to sharpened policy focus on anchoring inflation expectations”.

They, as well as the Maybank economists, flagged that electricity retailers have recently raised fixed tariff rates by about 1 to 11 per cent. The BOA economists also reported that retailers are withdrawing discounted floating price plans.

“This would add to (rather than blunt) pass-through of higher energy prices to core inflation, when regulated electricity and gas tariffs are adjusted at the start of each quarter,” they said.

These changes come ahead of regulated tariff adjustments in April, the banks’ economists noted.

BOA’s team also flagged a temporary increase in ComfortDelGro’s meter fares and additional driver fees, added fuel surcharges from ferry and airline operators, and wage increases for food service workers from July.

Said the Maybank economists: “The transmission of the war shock to prices is at a nascent stage.”

They believe inflation will climb more significantly and broaden in the coming months, with businesses in non-transport and utilities sectors squeezed by higher transport, freight, delivery and electricity costs eventually passing on higher input costs to consumers.

Acting in April

Given the intensifying cost pressures, several economists expect MAS to tighten monetary in the upcoming April monetary policy meeting. In contrast, Barclays anticipates that the central bank will continue to stand pat.

DBS senior economist Chua Han Teng said: “With the degrees of impact from the Middle East supply disruption being varied, going beyond the energy complex to the fertiliser market, inflation risks for 2026 are clearly skewed to the upside the longer the conflict persists, which could result in an earlier policy tightening bias.”

The StanChart duo said that while the authorities are “in part merely stating the facts of higher oil prices”, they believe there is room to “partially unwind some of the pre-emptive easing” from the first half of 2025.

This is due to higher inflationary pressures and steady consumer demand.

They maintained their view of a 50 basis point (bp) steepening of the Singapore dollar nominal effective exchange rate (S$NEER) to 1 per cent, from 0.5 per cent currently. Similarly, Maybank’s pair continues to expect MAS to tighten in April via a steepening of the S$NEER appreciation slope by 50 bps to 100 bps, to dampen intensifying import cost pressures.

The BOA economists maintained their case that MAS will “tighten in a measured manner from April”, raising the S$NEER twice, by 50 bps each in April and July, to 1.5 per cent by July. 

On the other hand, Brian Tan, head of non-China EM Asia economics research at Barclays, expects tightening “later rather than sooner”.

The bank’s base case remains for MAS to leave its monetary policy settings unchanged in April.

“The main risk is that the slope of the S$NEER policy band is raised by 50bps, to an estimated 1 per cent, earlier than our central scenario of July,” Tan said.

He added: “While the upcoming monetary policy statement and other comments from officials are likely to sound relatively hawkish, we think these would likely be mainly intended to keep inflation expectations under control – not to signal monetary policy tightening.”