Some economists eye policy easing in October after core inflation slows more than expected in July

SOME private-sector economists believe the Monetary Authority of Singapore (MAS) could ease monetary policy settings as early as its next meeting in October, after Singapore’s core inflation slowed to a more than two-year low in July.

Core inflation, which excludes accommodation and private transport, was 2.5 per cent, data from the Department of Statistics showed on Friday (Aug 23). This was lower than the 2.9 per cent recorded in June, as well as below economists’ median estimate of 2.9 per cent. It was also the lowest rate since February 2022, when it was 2.2 per cent.

Headline inflation was 2.4 per cent, the same rate as in June, and just a nudge lower than the median forecast of 2.5 per cent by private-sector economists polled by Bloomberg. Private transport costs increased, but was offset by lower accommodation inflation, said MAS and the Ministry of Trade and Industry (MTI).

OCBC chief economist Selena Ling said: “With headline and core CPI (consumer price index) now averaging 2.8 per cent year on year and 3.1 per cent year on year, the overall disinflationary trajectory should bode well (for a) monetary policy easing window in the months ahead.”

In particular, the upcoming policy meetings in October and January are “potential windows to watch” for easing moves, she added, given that “monetary policy is forward-looking and there is greater conviction that core inflation will subside towards the 2 per cent handle in 2025, after averaging 2.5 to 3.5 per cent this year”.

At its July policy meeting, MAS lowered its full-year forecast for headline inflation to a range of 2 to 3 per cent, but maintained its core inflation forecast range at 2.5 to 3.5 per cent. The forecast remained unchanged on Friday.

UOB senior economist Alvin Liew also expects a slight easing of monetary policy settings in October through a slight reduction of the Singapore dollar nominal effective exchange rate, or S$NEER, policy band.

Other economists, however, maintained that any monetary policy easing will likely take place only during January’s meeting, at the earliest.

“We expect that core CPI will stay sticky between 2 and 2.5 per cent throughout the year,” said RHB analysts Barnabas Gan and Laalitha Raveenthar. “Since core inflation has been sticky to date, we see the lack of impetus for (MAS) to tweak its policy parameters in 2024.”

The analysts lowered their full-year headline inflation estimate to 2.6 per cent, from 3.5 per cent previously, but maintained their core inflation forecast of 2.8 per cent.

Broad-based easing

In July, most broad CPI categories experienced lower inflation, led by easing services costs.

Services inflation moderated to 2.9 per cent, from 3.4 per cent the previous month, on the back of a slower pace of increase in holiday expenses.

Other key services components have been slower to ease, partly because labour supply remains tight, noted Maybank economists Chua Hak Bin and Brian Lee.

Transport prices bucked the trend. Private transport inflation picked up to 0.9 per cent, from a 0.7 per cent fall the previous month, due to smaller declines in the prices of cars and motorcycles, alongside a steeper increase in petrol prices.  

The lower-than-expected core prices prompted one research house to lower its full-year estimates.

Barclays economist Brian Tan slashed the core inflation forecast for 2024 to 2.7 per cent, from 3 per cent previously.

On Friday, MAS and MTI said core inflation was expected to stay on a “gradual moderating trend” over the rest of the quarter, and step down further in Q4 this year.

Maybank’s Dr Chua and Lee, however, do not expect core inflation to continue moderating at the same pace as it did in July.

“The last leg of disinflation may be tougher, given that the labour market remains tight and businesses are still passing on earlier increases in labour, taxes and administrative prices to consumers,” said the analysts, who maintained their full-year headline and core inflation forecasts of 2.8 per cent and 2.6 per cent, respectively.

Concurring, Liew of UOB noted that in the next two months, a further step-down of core inflation may face some headwinds due to major tourism-related events, such as the Singapore Grand Prix in September.

“We continue to project a meaningful step-down of core inflation to materialise only in (Q1 2025), driven by base effects,” he said. UOB maintained its full-year forecasts for headline inflation at 2.5 per cent, and core inflation at 3 per cent.

OCBC’s Ling flagged moderating services, private transport and accommodation inflation trends as “key factors” to watch, given that the larger supplies for housing and Certificates of Entitlement have helped with the disinflation process for the year to date.

She maintained her full-year headline inflation forecast of 2.6 per cent, but sees some downside risks to her core inflation estimate of 2.9 per cent.