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ECONOMY | Krisana Gallezo-Estaura, Singapore
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Is inflation easing for the first time in five months something to cheer about?

It’s also a solid 29-month low.

The headline number in March fell to 3.5% YoY which according to DBS is the lowest since October 2010.

Will inflation ease further? Read on what analysts had to say

Irvin Seah, senior economist, DBS

Inflation dipped sharply as expected and this makes for a revision of our full year inflation forecast. It is largely driven by the recent corrections in the COE premiums after the Monetary Authority of Singapore (MAS) tightened the financing terms for car loans.

Essentially, cars with an Open Market Value (OMV) that does not exceed SGD 20,000 will now face a maximum loan to value (LTV) of 60%. For a motor vehicle with OMV of more than SGD 20,000, the maximum LTV is now 50%. This is down from a maximum LTV of 100% previously. Furthermore, the tenure for vehicle loan has also been capped at 5 years.

These changes essentially imply substantially more cash up-front for consumers, which in effect, will slam the brakes on car demand and COEs. This is the main reason why COE premiums have fallen sharply and thereby creating the significant knock-on effect on CPI inflation. Note that private transport cost accounts for 11.66% of the entire CPI basket and the bulk of the swings in this sub-index are driven by the COEs.
While MAS has temporarily lifted the financing curbs to allow car dealers to clear off their existing stocks that were purchased based on the previous financing terms, and COE premiums have recovered partially, most consumers are expected to stay on the sidelines waiting for car prices and COE premiums to fall further. The market is going through an adjustment period before a new equilibrium can be reached. That implies slower sales and hence, more easing in car prices in the coming months.

Indeed, we expect inflation to ease further towards the 3.0% mark in the middle of the year before inching gradually back to 4% by the end of the year. Wage pressure and still high underlying business cost are expected to keep inflation elevated. But factoring in the effect of the COE premiums on inflation, full year inflation is now expected to average 3.6%, against our earlier projection of 4.0%.

Suhaimi Ilias, analyst, MayBank KimEng

The trend in the former reflected lower COE premiums and price adjustments by car dealerships following the introduction of financing restrictions on motor vehicle loans announced the Monetary Authority of Singapore (MAS) on 25 Feb 2013, which resulted in a
further -35% YoY drop in new motor vehicle registrations in Mar 2013 (Feb 2013: -48.4% YoY).

While “food” prices eased after the seasonal Lunar New Year demand to +1.8% YoY (Feb 2013: +2.3% YoY) as “Seafood” prices tumbled to +2.5% YoY (Feb 2013: +9.2% YoY), followed by lower cost of Vegetables & Vegetable Products (Mar 2013: +2.4% YoY; Feb 2013: +5.0% YoY) and Meat & Poultry (Mar 2013: +0.4% YoY; Feb 2013: +1.4% YoY).

Inflation will be driven by mainly domestic factors especially amid the tight labour market condition, as the continuation of MAS’s exchange rate policy of gradual SGD appreciation plus the in global commodity prices – and hence world inflation – should keep imported
inflation in check. Meanwhile, the official forecasts for 2013 headline and core inflation rates were respectively tweaked lower to 3.0%-4.0% from 3.5%-4.5% previously and to 1.5%-2.5% from 2%-3% previously.


Euben Paracuelles and Lavanya Venkateswaran, analysts, Nomura

CPI inflation eased to a lower-than-expected 3.5% y-o-y in March from 4.9% in February (Consensus: 3.6%; Nomura: 3.8%). We underestimated the drop in transportation costs (to 6.9% from 13.9% in February), but this is not surprising given the difficulty of pinning down the extent of the pass-through from the fall in the cost of car certificates of entitlement (COEs) which started in February and will affect headline CPI with a lag. But in line with our forecast, underlying inflation (which excludes private transportation and accommodation costs) eased to 1.7% in March from 1.9% in February, led by the food and services components.


 

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