Economists expect unchanged monetary policy in January even as December core inflation edges up to 3.3%

ECONOMISTS continue to expect the Monetary of Singapore (MAS) to maintain its monetary policy settings at its January review, even as December 2023’s inflation came in higher than predicted, based on MAS and Ministry of Trade and Industry (MTI) data on Tuesday (Jan 23).

The central bank will release the first monetary policy statement of its new quarterly schedule on Jan 29.

Headline inflation in 2023 was 4.8 per cent year on year, against MAS and MTI’s forecast of “around 5 per cent”. Full-year core inflation – which excludes accommodation and private transport – at 4.2 per cent was slightly above the official forecast of “around 4 per cent”. Headline inflation in 2022 averaged 6.1 per cent, while core inflation was 4.1 per cent.

These came as December’s inflation – 3.3 per cent for core, and 3.7 per cent for headline – accelerated and exceeded economists’ median estimates.

Core inflation was higher than the preceding month’s 3.2 per cent, Bloomberg’s median economist forecast of 3 per cent, and MAS’ expected 2023 year-end range of 2.5 to 3 per cent.

DBS economist Chua Han Teng said the uptick was mainly due to higher services inflation in December – the highest since mid-2023.

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He said: “The faster services price increase was driven by an increase in travel-related inflation, likely due to supportive year-end travel demand.”

Maybank economists Chua Hak Bin and Brian Lee added that further price hikes are on the cards, due to the S$0.10 to S$0.11 increase in bus and train fares per journey for adult commuters that began on Dec 23, 2023.

Headline inflation in December was higher than November’s 3.6 per cent and the Bloomberg median estimate of 3.5 per cent, reflecting sharper increases in private transport costs – due to larger increases in car and petrol prices – alongside the pickup in services inflation.

MAS maintained its 2024 core inflation forecast range at 2.5 to 3.5 per cent. It will update its headline inflation forecast range – previously predicted at 3 to 4 per cent – in the upcoming January Monetary Policy Statement.

Sticky core inflation

Economists agreed that core inflation remains sticky for at least early 2024.

The latest inflation release on Tuesday “adopted a rhetoric centring on slowing inflation pressures, a view that we disagree (with)”, said RHB acting group chief economist Barnabas Gan.

MAS noted in the December inflation report that core inflation will be on a “gradual” moderating trend, versus a “broadly” moderating trend in the previous report, said Maybank’s Dr Chua and Lee.

UOB economists Alvin Liew and Jester Koh said: “A slew of tax or administrative policy adjustments are likely to keep core inflation above its long-term historical average through 2024.”

DBS’ Chua expects upside domestic price pressures due to the goods and services tax hike to 9 per cent, and utilities price increases from carbon taxes, public transport fare hikes and higher water prices.

On the labour market front, economists noted continued tightness, despite some signs of cooling. Collectively, administrative wage adjustments on the Central Provident Fund, S Pass and Progressive Wage Model schemes are compounding labour cost pressures, Maybank’s team said.

Elevated food prices and higher energy prices remain, added HSBC Asean economist Yun Liu, noting that electricity tariffs are slated to grow 4.1 per cent on quarter in Q1 2024, as indicated by the Energy Market Authority.

RHB’s Gan noted: “The evidence shows that global food and energy prices will see further upside bias in the quarters ahead, thus suggesting that the slowdown in Singapore’s import price momentum is perhaps temporal.”

Gan and DBS’ Chua agreed that exogenous risks from geopolitical uncertainties and weather disturbances also pose upside risks.

Disruptions in the Red Sea may also push up shipping costs, HSBC’s Liu and the Maybank team agreed. UOB’s duo highlighted that the authorities included geopolitics-prompted shocks to “shipping costs” as an additional upside risk in their outlook.

But they balanced the assessment, citing that “an unexpected weakening” – a “sharper-than-projected slowdown” in their previous inflation release – in the global economy could induce a faster easing of cost and price pressures, the team added.

HSBC’s Liu expects the disinflation trend to continue, “but at a rather slow pace”, while Maybank believes it will pause in the first half of 2024.

Noting January’s fall in Certificate of Entitlement (COE) premiums, Maybank said that headline inflation will fall and diverge from core inflation.

Liu said headline inflation has already cooled down in 2023, largely due to energy disinflation. But she warned that upside risks remain: Despite the January pull-down, COE premiums had jumped to record highs in 2023. Accommodation costs remain elevated despite initial signs of property cooling, she added.

MAS to stick to the status quo

Analysts agreed that the MAS will likely keep all policy settings – the slope, width and level of the Singapore dollar nominal effective exchange rate (S$NEER) – untouched in January, given still-elevated core inflation.

A stronger appreciation stance may be less effective in dampening domestic cost pressures, which might require some rescheduling in the guidance of wage-related benchmark increases, Maybank added.

HSBC’s Liu said core inflation is unlikely to fall back into the MAS’ comfort zone in 2024. She expects potential easing in April at the earliest, with risks for a move later in the year instead.

UOB sees a slight slope reduction in April, but noted a rising risk that the reversal of monetary policy tightening may be delayed, “given the possible lagged transmission of earlier wage increases and elevated business costs into services inflation”.

Monetary policy had been left unchanged at both reviews in 2023, with the most recent adjustment – an upward recentring of the S$NEER – in October 2022.