Analysts see rising risk of off-cycle central bank tightening as Singapore core inflation climbs

THE Monetary Authority of Singapore (MAS) is expected to tighten policy settings at its half-yearly review in October – but may now be pushed to do so even earlier, analysts have said.

The latest warning came as consumer prices in Singapore continued their upwards creep in May. Headline inflation rose to 5.6 per cent, against 5.4 per cent in April, while core inflation – used to guide policy for the MAS – increased to 3.6 per cent, from 3.3 per cent before.

The outlook “suggests room for further monetary policy tightening on the horizon, probably sooner rather than later, especially since the major central banks are fixated on frontloading their rate hikes”, OCBC chief economist Selena Ling said in a note on Thursday (Jun 23).

The MAS is already tipped by analysts to steepen the rate of appreciation for the Singapore dollar nominal effective exchange rate (S$NEER) in October. It both steepened the slope and recentred the mid-point of the S$NEER policy band at its April meeting.

But watchers now think there is a rising risk that the central bank – which had earlier made a surprise tightening move in January – may not wait for its next meeting to take action.

Citi analysts Kit Wei Zheng and Jester Koh argued that “the door would be open for an off-cycle 50-basis point slope steepening in late July”, should June’s core inflation print come in at 4.4 per cent, as they predict.

While Barclays’ base case is still for the MAS to tighten around Oct 14, economist Brian Tan said in a note that “the risk of an earlier-than-expected inter-meeting move is relatively high”.

That’s as Ling, from OCBC, noted that the S$NEER has traded up to the top end of its parity band recently, which “leaves limited manoeuvre room from here” for the Singapore dollar.

Alvin Liew, senior economist at UOB said that the risk of another off-cycle tightening “cannot be ruled out, especially if core inflation accelerates well above 4 per cent in the next few months”.

The official inflation forecast remains at between 4.5 per cent and 5.5 per cent for all-items inflation in 2022, and 2.5 per cent to 3.5 per cent for core inflation.

Maybank economists Chua Hak Bin and Lee Ju Ye have raised their core inflation forecast to 3.2 per cent for the year, from 3 per cent before, citing “stronger-than-expected price pressures, particularly from energy and food”, but also rents and vehicle Certificate of Entitlement premiums.

Granted, Maybank is not expecting an off-cycle move, Chua told The Business Times, saying: “Inflation remains within the MAS forecast range. Room still for the S$NEER to appreciate within the band.”

Yet the Citi analysts hiked their full-year core inflation projection to 3.8 per cent, from 3.5 per cent before. They wrote in their report that “we continue to pencil in stronger than seasonal sequential increases in food prices on supply shocks” and expect Brent prices to average US$99 a barrel in 2022.

Liew upped his core inflation estimate to 4 per cent, from 3.5 per cent before – which would bust the MAS’ projection. Ling is similarly eyeing above-forecast core inflation of 4.5 per cent, on the expectation that “wage inflation is likely to ratchet higher” in a tight labour market.

The MAS and Ministry of Trade and Industry (MTI) noted in a joint statement that the all-items consumer price index picked up in May on “stronger inflation across the broad categories of food, services, retail and other goods, as well as electricity and gas”, even as private transport and accommodation costs – which are excluded from the core inflation gauge – also increased at a faster clip.

OCBC’s Ling added that “nothing suggests a reprieve is near” for consumer segments facing price pressures, amid global supply chain bottlenecks and the Russian invasion of Ukraine.

To be sure, Chua and Lee from Maybank said in a note that core inflation should peak in the third quarter, as the prices of commodities – including food – “have been slipping from their recent peaks” on a global slowdown and the relaxation of export bans.

But Alex Holmes, senior economist at Oxford Economics, told BT that any respite towards the year-end would be brief, as a planned 1-point Goods and Services Tax hike next January “will see core prices rise by almost the same extent, pushing the MAS measure of core inflation back above 4 per cent in the first quarter of 2023”.

In view of elevated global energy prices, Singapore policymakers this week unveiled an ambitious S$1.5 billion inflation relief package for businesses and lower-income households.

Still, Holmes told BT “the package is targeted and relatively small, so shouldn’t drastically alter the path of inflation”, while Ling said the measures “are unlikely to contribute to lower prices”.