COE premiums, inflation set to rise: DBS

Inflation to zoom pass the 3% mark.

According to DBS, COE premiums are set to rise and so will inflation. The Land Transport Authority has announced some minor tweaking in the allocation period of the COE to a three-month system, from six-monthly previously.

Here's more:

This is to address a sharp fall in supply of COEs that will be issued in the coming months. Even with this revision in policy, average monthly COE quota will still fall by about 12.3% be- tween Feb-Apr14, compared to the period Aug13-Jan14. This makes for further increase in premiums, which is currently hanging around the SGD 70-80K range (exclude motorcycle).

In fact, we reckon that premiums will continue to stay at around this level as policymakers are determined to reduce the traffic congestion problem and to encourage the commuters to switch to public transport.

In this regards, the Monetary Authority has already introduced some drastic tightening in car loans early last year to cool demand for private vehicles.

That caused a sharp correction in premiums between Apr-Aug but by Sept, premiums were rising again. The policy direction has been set and is unlikely to change in the near term. Hence, high COE premium is here to stay for a long while unless demand moderates somehow.

Otherwise, the pass-through effect on inflation will imply significantly higher inflation in the coming months. Our assessment is that infla- tion will rise again from April onwards when the base effect from the earlier tightening wears off.

We maintain our view that inflation will zoom pass the 3% mark and approach the 4% level by April. Full year inflation will average 3.0% compared to 2.4% in 2013.

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