Expectations mixed on Singapore’s monetary moves in 2024, even as core inflation is set to cool

SINGAPORE is set to enter a phase of disinflation in 2024, after two years of rapid price increases in the wake of the Covid-19 pandemic. Economists are divided over how monetary policy will shape up, though, even as the central bank shifts to quarterly rather than half-yearly decisions.

Core inflation, which excludes private transport and accommodation costs, is expected to cool to about 3 per cent in 2024 – the average estimate by analysts in a straw poll by The Business Times.

All those surveyed had estimates within the central bank’s official forecast range of 2.5 to 3.5 per cent. Maybank had the lowest forecast at 2.8 per cent, while Moody’s was at the other end with 3.2 per cent.

This is down from the elevated 4.1 per cent rate that analysts expected for 2023, comparable with the central bank’s forecast of 4 per cent. Core inflation in 2022 was also 4.1 per cent.

As for headline inflation, analysts expect it to ease to 3.4 per cent – around the middle of the official forecast range of 3 to 4 per cent – from an estimated 4.8 per cent in 2023.

There are “some good reasons” for underlying inflation in Singapore to ease, said MUFG economist Michael Wan.

Housing rentals should moderate further given a strong supply pipeline and the lagged impact of higher interest rates. Certificate of Entitlement (COE) premiums, required for car ownership, should also come off the eye-watering levels of 2023, following government measures to recalibrate supply.

“Most importantly, Singapore’s labour market is rebalancing gradually, with declines in job vacancy rates reflecting a better match between labour demand and supply,” he said.

A 3 per cent rate is, nevertheless, considerably higher than the historical average of about 1.6 per cent, and outside the comfort zone of the Monetary Authority of Singapore (MAS).

While MAS does not have an explicit inflation target, it considers a core inflation rate of “just under 2 per cent” to be “consistent with overall price stability in the economy”, according to its website.

Sticky inflation

Economists pointed to several factors causing inflation to be “sticky” rather than falling further.

First, an uptick is expected in early 2024 following the one-percentage-point goods and services tax (GST) hike to 9 per cent on Jan 1.

Previous such hikes have had notable cost pass-through, said DBS economist Chua Han Teng. “For every one-percentage-point GST hike, we estimate that headline and core inflation rose by 0.5 per cent and 0.4 per cent month on month seasonally adjusted, respectively, on average in the same month of the GST hike.”

Other government policy changes will also raise costs.

Bank of America Securities Asean economist Ang Kai Wei noted the increase in carbon tax to S$25 per tonne of emissions, from S$5, which will be priced into electricity tariffs; and administrative price hikes for water and public transport. All this is expected to raise core inflation by some 0.3 to 0.4 percentage point, he said.

Moody’s Analytics economist Denise Cheok added that food prices are fairly sticky, even if commodity prices have come off their peak.

“Demand-side pressures have also started to build due to the pickup in tourism, which are pushing up prices of services and retail goods,” she said.

Even as the labour market cools, unemployment rates remained below pre-pandemic levels. Remaining tightness could cause wages to stay elevated, said Maybank economist Brian Lee.

Labour costs will also be pushed up by recent hikes to S Pass and Employment Pass qualifying salaries and scheduled wage hikes under the Progressive Wage Model.

Fluctuating COE premiums could keep headline inflation volatile in the months ahead, said UOB’s global economics and markets research team. They noted that this was already reflected in October’s rebound in headline inflation, driven primarily by car prices experiencing a consecutive double-digit year-on-year increase.

More decisions, less action?

After a flurry of five consecutive tightening moves – including two off-cycle ones – within the span of a year, starting in October 2021, the central bank kept monetary policy settings unchanged in 2023.

MAS is switching to a quarterly schedule for monetary policy decisions next year, adding January and July statements to the current April and October ones.

Watchers said the increased frequency reflects MAS’ recognition of a more volatile macro environment.

“While frequent policy reviews are not necessarily better per se, having more frequent policy reviews would facilitate greater market understanding of its economic assessment and policy trajectory guidance, in addition to having more policy flexibility,” said OCBC chief economist Selena Ling.

With inflation expected to stay elevated for much of next year, MAS likely views its current monetary settings as “appropriate” to guide core inflation down to near 2 per cent by end-2024, said Maybank’s Lee.

Most economists expect MAS not to change the Singapore dollar nominal effective exchange rate (S$NEER) policy band for at least the first half of 2024.

The UOB team sees it as particularly premature to loosen policy in January, given risks of a “stronger-than expected pass-through” to inflation from the GST hike.

HSBC economist Yun Liu added: “After all, the MAS will need to see more evidence that inflation will consistently decelerate to its comfort zone before making the first easing move.”

Liu believes the first easing could come as early as April, while others expect it in the second half of the year.

Said Moody’s Cheok: “The current path of the S$NEER policy band is significantly steeper and higher than pre-pandemic settings, and the strong currency will dampen already tepid export demand.”

OCBC’s Ling said that if core inflation eases later in 2024, policy settings could be tweaked to allow the strong Singapore dollar to taper off against some of the Republic’s major trade partners.

“If core inflation does ease materially, then there is no need for the S$NEER policy to be so tight,” she added. “Other currencies within the trade baskets may have more room to appreciate against the SGD.”

The UOB team agreed that loosening policy would help ease concerns over export competitiveness.

Other economists do not rule out tightening, however, if upside risks to MAS’ forecasts materialise and inflation turns out higher than expected.

Risks include a worsening of geopolitical tensions, including Israel’s war in Gaza, as well as adverse weather events or natural disasters that may cause commodity price shocks.

MUFG’s Wan expects a “longer time horizon” for Singapore to get back to a core inflation rate of 2 per cent.

“Inflation will likely be more volatile and higher on average than what we saw (after) the global financial crisis,” he said. “This is in part because supply shocks are becoming more prevalent due to climate change, while supply is becoming more inelastic, for instance reflecting the desire to diversify supply chains and to decarbonise.”