MAS policy change still not expected as Singapore headline inflation ticks up in April, core remains flat

SINGAPORE’S headline inflation rebounded to 5.7 per cent year on year (yoy) in April, after March’s step down to 5.5 per cent, while core inflation was unchanged at 5 per cent, data from the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) showed on Tuesday (May 23).

Both measures were higher than economists’ forecasts, but market watchers said that the upside surprise is not enough for MAS to change its monetary policy settings in October.

Headline inflation in April was moderately higher than the median 5.5 per cent forecast by private-sector economists in a Bloomberg poll, as higher inflation was recorded for services and private transport.

Core inflation, which excludes accommodation and private transport, was similarly higher than the 4.7 per cent estimated by economists, and came as lower inflation for electricity and gas, food, and retail and other goods was offset by higher inflation for travel-related services.

The official full-year inflation estimates remained unchanged, with MAS and MTI largely maintaining their inflation outlook.

However, in the latest report, they noted that private transport and accommodation inflation are expected to moderate over the course of the year, on the back of the increase in certificate of entitlement (COE) quota (due to the redistribution of expiring five-year COEs) and ramp-up in the supply of housing units available for rental, rather than “staying firm” as previously expected.

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In April, private transport inflation was up on steeper car prices, with economists highlighting that COE premiums hit fresh records in April.

But Maybank economists Chua Hak Bin and Lee Ju Ye noted that in the first bidding exercise after the redistribution announcement, COE premiums fell by 8.9 per cent for Category A cars and 5.3 per cent for Category B cars.

On housing, accommodation inflation yoy was higher in April than in March, mainly due to a larger increase in the cost of housing maintenance and repairs, which more than offset a smaller increase in housing rentals.

In the coming months, OCBC chief economist Selena Ling expects base effects to continue favouring some moderation in the y-o-y increase in headline inflation, “assuming that global commodity prices remain well-behaved and domestic labour market conditions start to soften sightly given the downshift in the global economy”.

RHB senior economist Barnabas Gan added that demand-pull inflation is expected to slow in the near term, with a potential soft landing in private consumption in Q2 and magnified recession risks in H1.

“A potential recession and employment downturn may accelerate the easing in inflation pressures,” agreed the Maybank duo, reiterating that Singapore may slip into a technical recession if China’s reopening boost does not come in Q2.

But market watchers also expect inflation pressures to stay sticky in the near term.

Gan flagged “sequentially higher agricultural prices, albeit declining overall commodity prices on a y-o-y basis”.

Citing predictions for El Nino to most likely occur between July and September this year, he suggested that harvest supplies may be threatened by poor weather, posing upside risks to agricultural prices in the immediate months ahead.

Chua and Lee also said that core inflation will “remain sticky and fall slowly”, and Ling believes that it will be “downward sticky”.

She added: “However, this in itself may not be a game changer for MAS to budge from its current monetary policy stance yet.”

Barclays economist Brian Tan said April’s core inflation up “should be within the margin of error for MAS’s full-year forecast”.

A new price or growth shock would be needed to trigger another upward re-centring, he said, adding that the bar is also high for policy easing – a sentiment that was echoed by other economists.

The bar for a calibrated tightening move at MAS’ October meeting is high, but continues to outweigh the risk of MAS easing policy settings, said Bank of America economists Faiz Nagutha and Ang Kai Wei. They expect policy to remain unchanged “for some time”.

Ling noted that other central banks such as those in Australia and Malaysia paused before hiking interest rates again in recent months, “but this simply means that it is a pause, not a pivot with a view to rate cuts anytime soon”.

Maybank also projects that the MAS will maintain the current appreciation stance in October, “as core inflation decelerates in the second half of the year while growth comes in below trend”.

Inflation worsened for half of the categories in April.

In addition to higher private transport and accommodation inflation in April, services inflation was up yoy compared with March, mainly driven by a pickup in airfares and a faster pace of increase in holiday expenses.

On the other hand, retail and other goods inflation dipped on account of the slower price growth of household durables and clothing and footwear, as well as the fall in costs of personal effects.

On the bread-and-butter front, moderation in food inflation was attributed to slower rises in the prices of non-cooked food and prepared meals.

“Even though global food prices are already falling, food inflation at more than 7 per cent yoy is still elevated and has been sticky due to supportive domestic factors, including the impact of the one percentage-point GST hike and wage pressures from a tight labour market,” said DBS economist Chua Han Teng.

Electricity and gas inflation marked the sharpest decline, down to 2.7 per cent yoy, against 12.2 per cent in March. The drop was due to smaller increases in both electricity costs and the gas tariff.