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Analysts make monetary policy and inflation predictions after lower-than-expected March numbers

Felicia Tan
Felicia Tan • 10 min read
Analysts make monetary policy and inflation predictions after lower-than-expected March numbers
Analysts expect Singapore's core inflation to come in around 2.8% to 3.1% for the full year. Photo: Bloomberg
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Analysts have made various predictions on Singapore’s overall inflation numbers for the year after the country’s CPI-All items inflation – or headline inflation – stood at 2.7% for the month of March. Monetary Authority of Singapore (MAS) core inflation, which excludes private accommodation and transport costs, moderated to 3.1% in the same month.

The lower headline figure was due to lower private transport prices, which fell by 0.3% y-o-y due to lower certificate of entitlement (COE) premiums while the lower core inflation number stood due to lower food prices and services costs. Food prices fell due to a smaller increase in non-cooked food items after the Chinese New Year (CNY) holidays while services costs fell from lower airfares and a slower increase in holiday expenses.

Both the headline and core inflation figures came in lower than analysts’ expectations, below the Bloomberg consensus forecast of 3.1% and 3.5% respectively. Headline CPI is the lowest since September 2021 and marked the largest percentage point decline since January this year while core CPI was the lowest since January this year as well.

OCBC doesn't see imminent monetary policy easing by MAS

To Selena Ling, chief economist and head of global markets research & strategy at Oversea-Chinese Banking Corporation (OCBC), the larger-than-expected drop in March’s inflation prints may not translate to an imminent monetary policy easing by the MAS, whether at the July or October monetary policy statement (MPS).

That said, the figures should quell some nascent market speculation that the global monetary policy tilt could be reversing to a higher-for-longer interest rate environment again as opposed to policy easing.

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“Note that there is no change to official full-year 2024 headline and core CPI forecasts of 2.5% - 3.5% y-o-y,” Ling points out.

“In addition, there was also no shift in official rhetoric - the cited inflation risks remain intact, namely that upside risks remain the potential fresh geopolitical shocks and adverse weather events or a tightening in the domestic labour market conditions, whilst the downside risk remain an unexpected softening in the global economy and external demand which could induce a larger easing of cost and price pressures,” she adds.

More importantly, she continues, the COE premiums which fell in March reversed largely in April, so there shouldn’t be another big downside surprise in April’s inflation prints per se. In the latest April round, COE premiums for category A (small cars), B (large cars) and E (the open category) rose for the second straight time to $94,010, $102,001 and $103,249 respectively after the Car Expo on April 13 to 14.

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“Industry players reportedly expect COE prices to remain stable in May, while awaiting the Land Transport Authority (LTA) announcement of the quota for May – July,” Ling writes.

“In addition, domestic water prices were hiked 20 cents from April 1, whereas the 2Q2024 electricity tariffs for households will moderate by 0.3% (0.1%) per kWh to 29.79 cents per kWh compared to the previous quarter and the gas tariff (before GST) will also decline by 0.03 cent per kWh to 23.12 cents per kWh,” she adds.

To this end, Ling expects headline inflation to grow to around 3.2% y-o-y in 2Q2024 before easing further in the second half of the year to average around 3% y-o-y for the full year in 2024.

Core CPI may drop to around 3.1% y-o-y for the full year after clocking in at 3.3% y-o-y in the 1Q2024.

“Our base scenario sees MAS monetary policy settings remaining in a prolonged pause mode for the rest of this year as core inflation will only step down more significantly in 4Q2024 (our 4Q2024 forecast 2.8% y-o-y) into 2025, barring any unexpected surprises on the global economy and/or geopolitical front,” says Ling.

Maybank cuts headline inflation forecast; keeps core inflation expectations

Maybank Securities analysts Chua Hak Bin and Brian Lee have lowered their average headline inflation forecast to 2.6% from 3% for 2024 as they expect inflation for private transport to continue falling in the next few quarters.

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However, they are retaining their forecasts for core inflation at 2.8% in 2024 due to the higher water prices and businesses passing higher costs to consumers. Moreover, price pressures have remained elevated in services segments like health and education, explain Chua and Lee on why core inflation may remain sticky in the coming months.

That said, the analysts expect core inflation to drop gradually towards 2.5% in the 4Q2024, which may lead to the MAS easing its policy at the October MPS.

CGS keeps inflation forecast

CGS International economists Nazmi Idrus and Song Seng Wun have kept their inflation forecast at 2.9% for 2024, with the rising utility expenses mitigated by housing and utilities rebates.

The MAS has reaffirmed its stance that accommodation inflation is likely to continue heading south, due to the increasing availability of rental housing units throughout the year. The easing trend in private transport inflation is also likely to persist, they add.

“Following the MAS’s decision to maintain its policy stance in the recent April announcement, Singapore’s imported inflation will continue to moderate in the months ahead as the Singapore dollar nominal effective exchange rate (S$NEER) continues to strengthen against regional peers, in our view,” write Nazmi and Song.

“Given the substantial alleviation of price pressures indicated by March’s inflation figures, we believe there is a possibility of the MAS considering a potential relaxation of its policy during the July meeting, even as the risks to the inflation outlook remain,” they add.

RHB keeps headline and core inflation forecasts, expects MAS to retain monetary policy parameters at upcoming meeting

RHB Bank Singapore’s acting group chief economist and head of market research, Barnabas Gan, has kept his headline and core inflation forecasts unchanged at 3.5% and 2.8% in 2024.

“Our thematic report on global inflation suggests a contrarian view of global inflation, whereby our leading indices are flashing signs of hotter consumer prices on the horizon. Singapore, being an import-reliant economy, is susceptible to imported inflation,” writes Gan.

“Thus, domestic inflation will be driven by external and domestic factors, suggesting evidence of sticky inflation to persist in 2Q2024. There remain upside risks on global commodity prices, and in translation, Singapore’s consumer prices, should geopolitical tensions unexpectedly escalate,” he adds.

The way he sees it, the lower-than-expected headline inflation was likely due to a relatively stronger S$NEER year-to-date (ytd), which has effectively tapered import prices instead of lower demand conditions.

“Empirical inflation for household durables & services, housing & utilities, and miscellaneous goods & services have been higher or relatively close to our forecast. The data reinforces our view that Singapore’s growth momentum will continue accelerating as per our proprietary GDP leading indicator, and it is further supported by our global growth assumptions whereby we expect above-consensus US and China GDP prints for 2024,” says Gan.

“Our GDP leading indicator has materialised nicely for 1Q2024 GDP print (+2.7% y-o-y), whereby 2Q2024 GDP growth towards the 3.2% y-o-y handle,” he adds.

Meanwhile, Gan agrees that March’s figures may not hold but attributes the reason to higher commodity prices in 2Q2024.

“Given Singapore’s trade-reliant economic structure, we already see evidence of higher food, energy, and metal prices in the quarter, which may inject upside risks to Singapore’s imported inflation,” he writes.

“Moreover, our S$NEER model suggests the index at 1.47% above mid-point, which has weakened from around 1.7% at the beginning of the year, thus suggesting that the relatively weaker S$NEER seen towards April may support Singapore’s imported prices towards end 1H2024,” he adds. “Higher retail prices, on the back of concerts [Taylor Swift (March), Bruno Mars (April), Mirror (May)], which has and will attract inbound tourist arrivals, may continue to materialise in 1H2024.”

Overall, Gan is keeping his view that MAS should be retaining its policy parameters for 2024.

UOB sees ‘normalisation’ of monetary policy via ‘slight slope reduction’ as early as July

UOB senior economist Alvin Liew and associate economist Jester Koh is positing that the MAS could normalise its monetary policy as early as the July 2024 MPS. The central bank is likely to do so via a “slight slope reduction” of about 50 basis points (bps).

“[This is based on] continued transmission of imported disinflation into Singapore’s core CPI, anchored by the restraining effect from a gradual appreciation of the S$NEER on the prevailing slope settings, in addition to a softening of domestic cost pressures,” say Liew and Koh.

Overall, the economists expect Singapore’s core inflation to average 3.0% in 2024, down from 4.2% in 2023 and normalise further to 1.5% in 2025.

Citi expects core inflation to average around 3.0%

Citi Research analyst Kit Wei Zheng also expects Singapore’s core inflation to average around 3.0% for 2024. The analyst also expects April’s core inflation to remain flat at 3.1%, reflecting the hike in water prices and virtually flat electricity tariffs. The expectation also factors in the sequential increases in healthcare and education costs while airfares are estimated to see a “small technical rebound” after the sharper-than-expected drop in March.

The sharp fall in airfares came as a surprise to Kit given the continued strength in tourist arrivals in March from major concert events, says the analyst.

“Our seasonal adjustments suggest core fell 0.08% m-o-m seasonally adjusted or SA (February: 0.53%, January: 0.4% December: 0.46%), and slowed to 3.4% on a three-month moving average (3MMA), annualised basis (February: 5.46% January: 4.4%), vs the peak of >7.2% in May - August 2022,” he writes.

In the next few months, Kit sees that core inflation could still remain unchanged in May while dropping to June, leading to an average core inflation of 3.1% in 2Q2024, 3% in 3Q2024 and 2.8% in 4Q2024.

“As the base effects from the GST hike kick in, we expect core to average 2.1% in 1Q2025, moderating to 1.9% in 2Q2025, 1.8% in 3Q2025 and 1.7% in 4Q2025,” says Kit.

“Our gradual disinflation path anticipates some marginal pick up in core momentum in 2H2024, in tandem with an anticipated closing of the output gap and stabilization in labour demand. We see headline averaging 2.8% in 2024, and 2% in 2025,” he adds.

As such, Kit sees the current policy stance as likely close to neutral, as he still sees a “high hurdle” for easing.

“The Apr MPS statement that ‘the prevailing rate of appreciation of the policy band…is sufficient to ensure medium term price stability’ is a clear signal in our view that the current slope represents the cyclically neutral path of the S$NEER,” he writes. 

“As such, the hurdle for policy shifts in either direction remain high, but we still see a higher hurdle for easing than tightening going forward. Indeed, easing will be increasingly less likely as a closing output gap renders policy settings less restrictive over time, even with the current band settings maintained,” he adds.

With the lower-than-expected 2Q2024 core versus expectations in April, along with cost competitiveness that might be weighing on growth, the risk of steepening the slope of the S$NEER has been “meaningfully lowered”, in Kit’s view, especially in the July MPS.

However, as monthly inflation prints remain volatile and should there be no sharp disinflationary shocks, there still remains the possibility of the MAS steepening its S$NEER slope, which is more likely to happen in October or later.

BofA sees core inflation ‘on track’ to return to 2% in 2025

Like OCBC’s Ling, BofA Global Research analyst Ang Kai Wei sees the MAS being on an “extended pause” for some time.

That said, he is still mindful of inflation risks.

“MAS signalled greater comfort with the foreign exchange (forex) policy settings in April and we don't expect any changes for some time. However, MAS would likely remain mindful of inflation risks, including from higher energy prices and any de-anchoring of expectations,” he writes. 

“On the latter, one year-ahead core inflation expectation edged down to 3.9% in March versus 4.2% in December 2023 but was well above the 2017 - 2019 average of 3.2%. The recent rebound in COE prices may also influence expectations, at the margin,” he adds.

For 2024, core inflation is expected to average around 2.9% and 1.8% to 1.9% in 2025 with higher energy prices.

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