Tuesday, 3 Oct 2023

Analysts see MAS policy easing; core inflation hits 10-year low

The Monetary Authority of Singapore (MAS) will release its six-monthly monetary policy statement slightly earlier than usual on Monday, amid economist expectations that an easing in monetary policy in response to the coronavirus pandemic is on the cards.

News that the statement will be made ahead of the usual April directive also comes as core inflation last month hit a decade-low.

It fell into negative territory for the first time since January 2010, as the virus outbreak sent airfares and holiday expenses slumping, opening the door to an easing in monetary policy that economists predict will come soon.

MAS manages monetary policy through exchange rate, rather than through interest rates as other central banks do. Its Singapore dollar nominal effective exchange rate (S$Neer) is allowed to rise or fall within a policy band, set against a basket of currencies of the country’s major trading partners.

OCBC Bank’s head of treasury research and strategy Selena Ling noted: “The pressure is on. Many global central banks have made emergency moves in recent days. They will not be the first and they definitely don’t want to be among the last.”

She said analysts expect full-year overall and core inflation forecasts to flatline this year, with the second-to third-quarter readings likely to be negative.

“An easing to a neutral S$Neer slope has already been priced in, and if the S$Neer softens further … a recentring lower is also possible.”

Ms Ling said the MAS is also refreshing its inflation forecasts, previously at 0.5 to 1.5 per cent. Analysts project that the range will be between -0.5 and 0.5 per cent.

Maybank Kim Eng senior economist Chua Hak Bin said: “The earlier timing reflects the urgency for a policy response. This raises the likelihood for a more aggressive monetary easing move, possibly a recentring of the band and not just a slight change in the appreciation bias.”

United Overseas Bank economist Barnabas Gan and senior FX strategist Peter Chia said: “We reiterate our base case call for MAS to ease policy to neutral, down from a currently perceived +0.5 per cent appreciation slope.”

Core inflation, which excludes the costs of accommodation and private road transport, fell sharply to -0.1 per cent year on year last month, from 0.3 per cent in January, MAS and the Ministry of Trade and Industry (MTI) said yesterday.

Overall inflation also came in lower at 0.3 per cent last month on a year-on-year basis, compared with 0.8 per cent in January.

The cost of services fell to -0.4 per cent last month, a slide from the 0.5 per cent in January, because of the fall in airfares and holiday expenses.

Private transport inflation was also lower due to a smaller increase in car and petrol prices, falling to 2.4 per cent last month.

Food inflation dropped to 1.6 per cent last month, while the cost of electricity and gas fell at a slower pace, to -7.4 per cent last month.

The cost of retail and other goods fell at a more gradual pace, to -1 per cent, as clothing and footwear as well as medicines and health products saw smaller price contractions.

MAS and MTI said that in the quarters ahead, external sources of inflation are likely to remain benign amid weak demand conditions and generally well-supplied food and oil commodity markets.

“Oil prices declined sharply in March and could stay depressed for an extended period amid the global economic slowdown and an anticipated rise in oil supply,” they said.

“However, international measures to contain the Covid-19 outbreak have led to supply chain disruptions, which could put some upward pressure on imported food prices.”

The Covid-19 outbreak has weighed heavily on the aviation and tourism industries, which could in turn lower the prices of travel-related items, they noted.

“In addition, the implementation of safe-distancing measures and fall in tourist arrivals have dampened consumer demand, and will cap any price increases for discretionary goods and services.”

Maybank Kim Eng’s Dr Chua and Ms Lee Ju Ye said: “We expect to see inflation easing further in the coming months as the collapse in demand due to the Covid-19 will outweigh any price pressures from supply disruptions.

“A weakening labour market will also weigh on consumer sentiments.”

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