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Economists eye monetary easing as Singapore's core inflation slips into the red for first time in a decade

Amala Balakrishner
Amala Balakrishner3/23/2020 05:37 PM GMT+08  • 4 min read
Economists eye monetary easing as Singapore's core inflation slips into the red for first time in a decade
MAS will release its next six-monthly Monetary Policy Statement on March 30 – slightly earlier than usual. However, it added that this should not be seen as an off-cycle move.
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SINGAPORE (Mar 23): Singapore’s core inflation continued its decline, falling into the red in February for the first time in a decade. The last time it was in the negative terrain was in January 2010, when it dipped to -0.5%.

The price gauge, which registers inflation levels excluding accommodation and road transport costs, came in at -0.1% for February 2020, according to the consumer price index (CPI) released by the Department of Statistics on Monday.

This is a significant drop from the 0.3% recorded in the previous month and below the 0.1% forecast by private sector watchers in a Reuters poll.

Meanwhile, headline inflation – the measure of the total inflation in the economy – came in at 0.3%, a smidgen below the 0.4% forecast by market watchers, but a sharp dip from the 0.8% registered in January.

“The Covid-19 outbreak has weighed heavily on the aviation and tourism industries, which could in turn lower the prices of travel-related items in the CPI basket,” the Ministry of Trade and Industry (MTI) and Monetary Authority of Singapore (MAS) note in a joint statement.

CPI was further hit by a decline in the cost of services in other consumer-facing sectors such as retail and expectations of a monetary easing in April.

Electricity and gas costs registered the highest decline of -7.4%. While an improvement from the -8.1% logged in January, February’s decline follows a slowdown in take-up rates for the Open Electricity Market.

Services inflation also dropped significantly to -0.4%, from the 0.5% expansion the sector registered the month before. This comes on the back of a decline in airfares and holiday expenses.

The cost of retail and other goods also fell gradually to -1.0% - from the -1.4% it logged in January – as clothing and footwear items and medicines and other health products recorded smaller price declines.

Meanwhile, food inflation edged down by 0.1% to 1.6% following marginal increments to the prices of cooked food.

Similarly, private transportation inflation came in at 2.4% down from 4.6% in January, due to a smaller increase in prices of cars and petroleum. Accommodation costs conversely rose 0.4%, from 0.3% the previous month, following a stronger pickup in housing rentals.

For now, the MAS and MTI expect inflationary pressures to remain subdued in the near-term amid Covid-19 as well as softening labour market conditions.

“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,” the authorities note.

“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,” they add.

And with the recent enforcement of stricter social distancing measures, tourist arrivals and consumer demand are expected to take a hit “and will cap any price increases for discretionary goods and services”.

While the MAS and MTI have not updated their forecast ranges for headline and core inflation, they note that any updates will be announced in the Monetary Policy Statement due on March 30.

The previous official forecast range for full-year core and headline inflation was 0.5% - 1.5%.

Private-sector economists are now downgrading their forecasts with Maybank Kim Eng economists Chua Hak Bin and Lee Ju Yu expecting full-year headline and core inflation to come in at 0.3%. They also expect the MAS to lower its range to between -0.5% and 0.5%.

“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,” they say.

OCBC Bank head of treasury and strategy, Selena Ling, agrees. She notes downside risks to both headline and core inflation for the next three to six months.

Drawing reference to the SARS outbreak in 2003, she says a similar decline in consumer confidence and public consumption then had resulted in “deflationary pressures for CPI components such as travel, food and beverage and entertainment, in particular”.

According to Ling, a domestic technical recession – defined as two consecutive quarters of negative growth – may be plausible in the second quarter. She also expects inflation levels to be in the red in the second and third quarter.

To this end, private-sector economists say an easing of monetary policy by the MAS is on the cards, amid expectations of a lower-than-expected full-year growth forecast and the possibility of deflation.

Barnabas Gan, an economist at the United Overseas Bank (UOB) notes “an easing of monetary policy will allow the Singapore Dollar Nominal Effective Exchange Rate (SGD$NEER) to weaken further in line with the softened economic outlook,” amid a drop in consumer demand and oil prices.

Gan, along with JP Morgan economist Sin Beng Ong, is also looking at a re-centring of the band, with a significant downward adjustment to the band.

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