Here's the most likely scenario when policy makers meet on April.
Inflationary pressures reaccelerated in December 2012, with the headline inflation jumping by 0.7% points to 4.3% yoy, which is higher than market consensus for +3.8% yoy.
OCBC Investment Research notes that the culprits were familiar again, namely domestic housing and private road transports (ie. cars), which contributed more than two-thirds of the headline inflation in December. Accommodation costs surged 8.5% yoy (previously 6.6% yoy) and COEs contributed to the 9.3% yoy increase in private road transport (previously 6.7% yoy).
This took full-year 2012 headline inflation to 4.6%.
Here’s what analysts think of inflation and policy rates moving forward:
Selena Ling, analyst, OCBC Investment Research
We expect headline inflation to moderate but remain sticky around the 4% yoy handle in 2013. We do not expect the domestic price pressure points of housing and private road transport to fade significantly in the near-term. While the recent cooling measures may aid to curb the potential pace of imputed rental revisions, high COE premiums are likely here to stay with the quota constraints, as illustrated by the buoyant results from the latest tender exceeding $90k.
In addition, the tight labour market may filter through to services inflation as wages get adjusted higher and businesses attempt to pass on the costs to end-consumers, coupled with global food price inflation which may also start to play a more prominent role as well due to supply risks. Nevertheless, policymakers are likely to take a more benign view of inflationary pressures if the MAS core inflation remains contained around the 2-3% handle as per the official forecast for 2013.
That said, it is still too early to take the pedal off the metal in terms of the current hawkish monetary policy setting for the upcoming April review.
Joey Chew, Barclays Capital
We forecast inflation will average slightly below 2% in H1, reflecting a high base of comparison and benign food prices. We expect prices to start rising in H2. For services cost inflation, we expect it to remain stubborn through the year due to a tight labour market. Overall for 2013, we forecast 2.2% core inflation, a 30bp drop from the average in 2012.
Notwithstanding some volatility stemming from COE prices, we think disinflationary forces in accommodation costs will drive the headline rate lower to 3.9% in 2013, from 4.6% in 2012. Seven rounds of property market cooling measures and a ramp-up in supply are likely to lead to a stabilisation, if not a mild correction, in property prices and rents, in our view.
Despite lower inflation rates, we think the Monetary Authority of Singapore (MAS) will maintain its exchange rate policy stance in April (2% slope, and a +/-2% band, by our estimates) for three key reasons.
• First, we believe MAS will want to guard against imported price pressures that may arise in H2 as global growth picks up. We estimate that a 1% appreciation of the SGD NEER dampens MAS’s core inflation measure by 0.2pp in the first year.
• Second, maintaining its appreciation policy should help to contain inflation expectations, which have been raised after three consecutive years of above-4% inflation.
• Finally, we think the worst may be over for the Singapore economy, which likely narrowly escaped a technical recession in Q4. We forecast slightly stronger growth of 2% in 2013, compared with 1.2% in 2012. Stronger external demand should also mitigate the drag on growth from industry restructuring.
The step-up in inflation in Singapore since 2007 reflects global commodity price trends, and is also partly a consequence of government policy choices. We do not think this is a sign that the exchange rate policy has lost its relevance.
We see above-average inflation persisting until possibly 2015, when more new housing supply comes to the market, the COE quota increases on the deregistration of the bumper crop of licenses sold over 2005-08 and productivity gains should be materialising to offset higher labour cost pressures. Until then, the bar for loosening monetary policy will remain high, in our view.
Irvin Seah, economist, DBS
Just when everyone thinks that inflationary pressure in Singapore will finally ease for good, the headline number surprised once again by posting a 4.3% YoY rise in December. This is up from 3.6% in November although frankly speaking, the previous month’s number is largely arithmetic and nothing to shout about.
The point is: domestic inflationary pressure is still exceptionally high. Effects of the high COE premiums and rentals have been manifested in the inflation reading. Both transport and housing CPI indexes crept higher in the month. Note that the December number was also exacerbated by the fact that COE premiums hit a new high of SGD 97,000 (open category). That by itself represents a 30-35% increase compared to the previous year.
Private road transport accounts for 11.7% of the total weights in the CPI basket.
Moreover, the labour market has been extremely tight. We’ve flagged the inflationary risk of foreign labour policy tightening as earlier as March 2010. Right now, rising labour cost is probably the number one driver of inflation in Singapore. The risk is that inflation expectation has probably been raised significantly in recent years due to the persistently higher than usual inflation. Workers will surely demand higher wages to compensate for the loss in their real income. This thus paves the way for the risk of a wage-price spiral.
Inflation will run sideways, hovering around the 4% mark throughout the year. The factors that have been keeping inflation at such higher than normal level will continue to fuel the pressures. With the inflation still higher than normal and the growth outlook expected to improve, the Monetary Authority of Singapore (MAS) will most likely maintain its current SGD NEER appreciation policy stance in the upcoming review in April.
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