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Analysts expect authorities to revise inflation forecasts upwards; MAS may tighten monetary policy in October

Felicia Tan
Felicia Tan9/26/2022 03:50 PM GMT+08  • 9 min read
Analysts expect authorities to revise inflation forecasts upwards; MAS may tighten monetary policy in October
Singapore's headline inflation stood at 7.5% y-o-y while core inflation stood at 5.1% y-o-y in August 2022. Photo: Bloomberg
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As Singapore’s headline inflation surpassed market expectations with a 7.5% y-o-y print in August, analysts are expecting the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) to soon lift their official inflation forecasts.

The headline inflation has brought Singapore’s inflation for the first eight months of 2022 to 5.7% y-o-y, which is near the upper end of the official headline CPI forecast of 5% - 6% y-o-y. The surge was due to the higher car prices, more expensive holiday expenses, bigger hike in housing rentals and more costly food services and non-cooked food items.

During the month, core inflation also jumped similarly to 5.1% y-o-y, reflecting the stronger pickup of prices for services and food.

“[The figures] underpin our belief that core inflation may not have peaked yet for the Singapore economy as domestic drivers for inflation are becoming more prominent,” says Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank.

While MAS and MTI have yet to change their official headline and core inflation forecasts, core inflation, Ling says this may imply that core inflation may peak later than initially expected as core inflation is tipped to remain elevated over the next few months.

The later peak in core inflation may not come as a total surprise since major central banks like the US’s federal open market committee (FOMC) are already signalling the need to continue to front-load aggressive monetary policy tightening as inflation may stay elevated for longer, Ling says.

See also: Singapore all-items CPI increase by 7.5% y-o-y in August; MAS Core Inflation up by 5.1% y-o-y

“Our headline and core inflation forecasts stand at 5.9% and above 4.2% but recent developments such as the Russia-Ukraine war escalation and rice export ban by India may imply further upside external price risks in addition to the domestic wage pressures,” she writes.

UOB’s senior economist Alvin Liew and Citi Research’s Kit Wei Zheng believe that the authorities will raise their official forecasts, noting that MAS and MTI’s most recent assessment omitted their previous expectation for core inflation to peak in the 3Q2022 since its July report.

In August, the authorities took it a step further and only noted that the “MAS Core Inflation is projected to stay elevated over the next few months”.

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On this, UOB’s Liew has kept his forecasts for Singapore’s headline inflation to average 6.0% and core inflation to average around 4.2% in 2022.

“Importantly, while our headline forecast is at the top end of the official forecast range, our core inflation forecast exceeds the official estimates, and we believe that it will soon be revised higher by the authorities,” he writes.

Similarly, Citi’s Kit says MAS is likely to raise its core and headline forecasts by 50 basis points to around 4% and 6% respectively, with 2023’s core and headline inflation at 3%-4%. Kit has estimated core inflation to come in at 3.5% in 2023 and headline inflation to come in at 3.7% in the same year.

“Taken together, MAS almost certainly sees core peaking higher and later vs its earlier July assumption of 4%-4.5% in 3Q2022. Indeed, MAS may see upside risks to its subsequent Sept 1 assessment that domestic inflation should not accelerate further in 4Q2022, which we reckon likely saw core averaging 5% in 3Q2022 and 4Q2022 in the absence of further electricity tariff hikes,” the Citi research analyst writes.

“We now forecast core to rise further to 5.2% in September and 5.4% in October, falling to 5.1% in December,” he adds.

Kit continues: “Full pass through of the 1% GST hike will keep January - February 2023 core CPI averaging 5.5%, such that 4Q2022 and 1Q2023 core could both average 5.3% (3Q2022: 5%). We see headline peaking at 7.7% in September, moderating to 6.5% by December, and averaging 7.4% in 3Q2022, 6.8% in 4Q2022, and 6% in 1Q2023.”

Maybank Securities economists Chua Hak Bin and Lee Ju Ye have also raised their inflation forecasts for 2022, where their core inflation estimate now stands at 4.2% (from 4%) and headline inflation at 6.2% (from 6%). This is to account for the larger-than-expected pickup in food and services costs, the analysts say.

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As MAS and MTI note that the domestic labour market remains tight, keeping wage growth strong, Maybank’s Chua and Lee believe that the wage-price spiral will intensify in the coming months with the implementation of the local qualifying wages (of $1,400) in September.

The spiral will also be affected by the expansion of the Progressive Wage Model to the retail sector in September this year and F&B sector in March 2023.

“Travellers flying out of Changi Airport will also have to pay higher airport charges, with total departure fee rising by $6.90 to $59.20 from Nov 1, and by another $3 in April 2023 and a further $3 in April 2024,” the economists note.

To this end, Chua and Lee say they expect the MAS to raise its headline inflation forecast to 5.5%-6.5% (from 5%-6%) and core inflation forecast to 3.5%-4.5% (from 3%-4%).

MAS to tighten monetary policy in October

Following August’s elevated numbers, the same analysts are expecting to see a further tightening of MAS’s monetary policy come this October.

“As the MAS monetary policy review in mid-October draws near, the stage may be set for another tightening to provide more policy space for the next six months if core inflation remains sticky on the upside, especially amid the ongoing wage adjustments due to the tight labour market,” says OCBC’s Ling.

UOB’s Liew agrees, adding that the central bank is unlikely to “do another off-cycle” as we are just about two to three weeks from its monetary policy statement (MPS) release.

The economist expects MAS’s MPS to come in and around Oct 10 to Oct 14.

“The inflation prints are clearly not easing, so we still expect MAS to tighten policy in October. Aggregating the series of tightening policy responses since October 2021, we estimate that MAS policy stance has already moved above the neutral setting, into the restrictive space. And with the developments on the core inflation and services inflation, it further reinforces our view of further tightening from the MAS this October,” he writes.

On this, Liew is expecting the MAS to tighten further via the steepening of the Singapore dollar nominal effective exchange rate (S$NEER) gradient.

“We estimate the slope of the S$NEER will be raised to 2% (from the current projected 1.5%). There is a risk of another double-tightening via an added re-centring of the policy mid-point as the S$NEER is already trading at 1.8% (near the projected top end of the band), and an even steeper slope (say, 2.5%) also cannot be ruled out, especially as core inflation accelerates above 5% in August,” he says.

Citi’s Kit now sees a probability of 70% from 60% that there will be an upward re-centring of 100 basis points and a concurrent slope steepening of 50 basis points.

“Compared to MAS’s core inflation forecast in July, Citi’s latest inflation forecast would imply the neutral NEER path is now around 75 basis points higher in 3Q2022, and 150 basis points higher in 4Q2022, or [around] 115 basis points on average in 2H2022. Should MAS still maintain its Sept 1 forecast, this would still be 100 basis points higher than its July forecast. This implies that an upward recentring of at least 100bps is necessary to restore near term real policy settings to levels anticipated at the July off-cycle recentring,” Kit writes.

“A 150-200 basis points upward recentring would imply further tightening beyond July levels, which is increasingly plausible given the widening gap vs MAS’s implicit target of 1.7%,” he adds. “A concurrent 50 basis points slope steepening will maintain these settings into 2023.”

Furthermore, with the short-term exchange rate pass-through possibly dampened by the large share of imports invoiced in USD and SGD, Kit says the MAS’s tightening may also need to be “more front-loaded to slow inflation momentum before the GST hike in January 2023”.

“Factoring in elevated global inflation and the ratio of tradeables to non-tradeables productivity, our calculations suggest [an estimated] 6% appreciation of the NEER in 2022 is consistent with the implicit domestic inflation “target” and equilibrium real effective exchange rate (REER), moderating only slightly to 3.5%-4% in 2023,” says Kit.

“Such a large appreciation is unlikely to be achieved through a steeper slope alone. To the extent that more hawkish Fed action was driven by higher US inflation, higher foreign inflation should further strengthen the case for stronger S$NEER appreciation,” he adds.

“Risks are for either only a recentring (25%) or a 100bps steepening (5%), depending on the extent to which MAS responds to near-term upside inflation surprises or its conviction over the 2023 outlook,” he continues.

Maybank’s Chua and Lee are expecting the MAS to tighten its monetary policy in October by re-centring the S$NEER to the prevailing level.

“The S$NEER is currently trading at around +1.5% above the implied mid-point, based on our estimates,” the economists write. “We are not expecting a ‘double move’ (both re-centring & steeper slope) because of the rising likelihood of a ‘technical recession'.”

Further to their estimates, the economists are also raising their interest rate forecasts by another leg, with the three-month Singapore Interbank Offered Rates (SIBOR) to climb to 3.8% from 3% by end-2022 and to 4$ from 3.2% by end-2023.

“The three-month SIBOR has climbed to 3.03% as of Sept 22 from a low of 0.43% in August 2021. We are raising our three-month Singapore Overnight Rate Average (SORA) forecast to 2.8% (from 2.75%) by end-2022 and 3.5% (from 2.95%) by end-2023,” the economists from Maybank write.

“The higher interest rate forecasts factor in a more hawkish Fed and steeper trajectory or ‘dot plots’. We expect the Fed to hike by another +125 basis points in the remaining two meetings this year (November and December) and by another +25 basis points in 2023,” they add. “The Fed’s more hawkish projections could drive Singapore’s mortgage rates to 4.5% by the end of this year and 5% by middle of next year, which will be near 20-year highs.”

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