Economists split on monetary policy tightening in April after February inflation data

AFTER February inflation data released on Thursday (Mar 23) surprised on the downside, economists are mixed on whether the Monetary Authority of Singapore (MAS) will tighten monetary policy at its meeting in April.

The recent stresses in the global banking system are also a factor in the mix.

Headline inflation eased to 6.3 per cent in February, from 6.6 per cent in January. This marked a nine-month low, due to slowing private transport costs from last year’s high base for certificate of entitlement premiums, noted Maybank economists Chua Hak Bin and Lee Ju Ye.

Core inflation, which excludes accommodation and private transport, remained unchanged from January’s 5.5 per cent – the highest since November 2008. This came as lower services inflation, led by lower air fares on the back of increasing capacity, was broadly offset by higher inflation for retail and other goods, as well as electricity and gas. 

January’s 1 percentage point GST hike also continues to keep prices elevated, economists noted.

Both prints were lower than median estimates of 6.4 per cent for headline inflation and 5.8 per cent for core inflation in a Bloomberg poll of economists.

The MAS and the Ministry of Trade and Industry (MTI) in their joint report maintained their inflation outlook for 2023, projecting headline inflation to average between 5.5 and 6.5 per cent and core inflation, 3.5 to 4.5 per cent.

While a recent quarterly survey of private-sector economists found that most respondents do not expect policy tightening at its meetings this year, industry watchers seemed more mixed on this issue following the latest inflation prints.

DBS senior economist Irvin Seah noted that inflation will gradually ease, but remain elevated, with slowing accommodation inflation masking real inflationary pressures. Still, he does not expect the MAS to tighten further.

Barclays’ Brian Tan agreed. He noted that “latest figures suggest core inflation is more clearly undershooting the MAS’ projections”, highlighting that this is unlike the situation leading up to the last three re-centrings in 2022.

On its own, high core inflation is unlikely to justify further tightening when driven by a GST hike, especially when sequential increases are moderating, he said. MAS and MTI “appeared to incorporate a softer tone on imported inflation” in their latest inflation report, he added.

The bank cut its full-year 2023 core inflation forecast to 3.9 per cent from 4.2 per cent previously, representing a slight decline from 2022’s 4.1 per cent average.

While his base case maintains that monetary policy will not tighten, Tan noted the risk of an increase in the slope of the Singapore dollar nominal effective exchange rate (S$NEER).

Bank of America Asia and Asean economists Mohamed Faiz Nagutha and Ang Kai Wei, in contrast, believe that this will be the case, leaning towards a “slight” slope increase.

“Recent data suggests that the tightness in the domestic labour market is persisting for a longer period than previously anticipated,” they said.

This is even as they, among other economists, noted the recent disruption in the US and European banking sector.

“Inflation may fall a lot more quickly in the coming quarters as tightening credit conditions and rising short-term interest rates dampen investment and consumer spending,” noted the Maybank team. “(This) may mean that the MAS may not have to tighten at the October policy meeting.”

Still, taking into account the GST hike and expansion of the Progressive Wage Model that took effect on Mar 1, Chua and Lee expect MAS will again re-centre the S$NEER in April to dampen price pressures.

Similarly, while UOB senior economist Alvin Liew said that the bank’s “confidence level for further tightening has been lowered” on account of the banking-sector turmoil, he also noted the “stickiness” of core inflation, adding: “If systemic impact and contagion risks on the US and global financial sector continues to be reduced by actions from the major central banks, then it will be reasonable to expect the MAS to tighten further, via a re-centring higher of the S$NEER.”

HSBC’s Yun Liu observed that Singapore’s labour market remains tight, with low unemployment rates and substantially high wage growth above the historic level. This may keep services inflation sticky, she said.

“Recent market developments have introduced the debate on the priorities of central banks (price stability versus financial stability),” she said, noting that the US Fed chose price stability with its latest 25 basis point rate hike, though a dovish one.

“Despite increasing attention on (financial stability), we believe (price stability) still remains on the top list of the MAS,” she continued. Yun expects the MAS to “complete its tightening cycle” with a final re-centring in the upcoming April meeting.