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Analysts see 'final tightening' by MAS in April meeting after February's inflation figures

This will be the sixth consecutive tightening move since October 2021.

Analysts are mostly seeing a “final tightening” by the Monetary Authority of Singapore (MAS) at its April monetary policy meeting after February’s inflation figures.

Singapore’s CPI-All Items inflation – or headline inflation – rose by 6.3% y-o-y and 0.6% m-o-m. MAS Core inflation, which excludes private transport and accommodation, rose by 5.5% y-o-y but remained unchanged m-o-m.

Maybank Securities economists Chua Hak Bin and Lee Ju Ye are expecting the MAS to tighten its policy again by re-centring the Singapore dollar nominal effective exchange rate (S$NEER) band to the prevailing level at the mid-April meeting in a bid to dampen core inflation.


The economists do not expect the MAS to change the band’s slope and width.

“This will be the sixth consecutive tightening move since October 2021, and possibly the final one as the economy is slowing significantly due to weakening external demand,” write the economists in their March 29 report.

“The US and Europe banking turmoil has had limited impact on Singapore’s banking system and economy so far. The Fed’s liquidity facilities and deposit guarantees are helping to stabilize financial markets and calm depositors at the troubled banks. The S$NEER is trading at around +1.5% above the implied mid-point, or at the upper half of the band, by our estimates,” they add.

While the analysts kept their inflation forecasts in their March 23 report just after the release of February’s figures, they have now raised their forecast for core inflation to come in at 4.5% instead of 4% previously for 2023. Their headline inflation forecast remains at 6%.

“We expect core inflation to remain sticky and fall slowly with the 1% GST hike and expansion of the Progressive Wage Model to larger sectors, including food services, waste management and occupational (administrators, drivers) on March 1,” they predict in their March 23 report.

In both reports, the economists see the recent global banking crisis to exert a “deflationary impact” on growth and prices

“Inflation may fall a lot more quickly in the coming quarters, as tightening credit conditions and rising short-term interest rates dampen investment and consumer spending,” they write.

“Probability of a US recession has risen to 58% over the next 12 months, by our model estimates based on the three-month 10-year Treasury yield curve. Singapore’s GDP growth is highly correlated (0.38) with US growth historically. [The] probability of a Singapore recession has risen to 30%, higher than the 22% in March 2008 (prior to [the] global financial crisis or GFC). China’s reopening has not had a meaningful impact on manufacturing and exports so far, but we expect a more visible impact on growth from the second quarter onwards, which should help decouple Singapore from a US recession,” they add.

The economists are also predicting the three-month Singapore overnight rate average (SORA) climbing to 3.7% from its current 3.5% by the end of the year, with the assumption that there is one more 25 bps rate hike from the US Fed.

“Tightening monetary conditions and rising interest rates are dampening loan demand. System-wide loan growth contracted by - 4.2% in January 2023, led by business loans,” they write.

UOB’s senior economist Alvin Liew is also expecting the MAS to tighten its policy further at its upcoming April meeting via the re-centring of the S$NEER policy mid-point.

“We believe monetary policy has moved further into a restrictive stance but it may be still too early to call for a pause given the inflation concerns, especially for core inflation,” Liew writes.

“Admittedly, our confidence level for further tightening has been lowered due to the US and European banking sector turmoil in recent weeks. If systemic impact and contagion risks on the US and global financial sector continue to be reduced by actions from the major central banks and governments, then it will be reasonable to expect the MAS to tighten further,” he adds.

ING’s senior economist Nicholas Mapa notes that the “still elevated inflation” should have the MAS “on notice” ahead of its April meeting.

“With price pressures still potent, the MAS will likely need to retain its hawkish stance until inflation slows considerably and approaches target,” he writes. “Complicating any potential MAS moves however is the fact that real sector economic data has been soft with retail sales unexpectedly stalling in January while non-oil domestic exports remain in contraction for five months and counting.”

In his note, Mapa is expecting the MAS to achieve a form of balance between the elevated inflationary environment coupled with Singapore’s slowing growth.

HSBC’s economist Yun Liu is expecting the MAS to tighten its policy “one last time” in April by re-centring at its upcoming meeting.

"We continue to believe that upside risks to core inflation linger, particularly given the persisting tightness in its labour market, warranting the MAS to pre-empt with one last tightening move. Therefore, our central case remains for the MAS to re-centre the S$NEER policy band to the 'prevailing level' but keep the slope unchanged at 1.50%," she writes in her March 29 report.

"That said, we also acknowledge the risk of the MAS maintaining its monetary settings unchanged, if it feels the risk of moderating growth trumps inflation concerns," she adds.

While Liu sees that the country’s headline inflation has gone past its peak, she expects core prices to remain “sticky and elevated” in the 1H2023 before “meaningfully moderating” in the 2H2023.

“After all, Singapore’s labour market remains tight, with low unemployment rates and substantially high wage growth above historic levels. This will support services inflation to remain sticky,” she writes in her March 23 report.

“Alas, recent market developments have introduced the debate on the priorities of central banks (i.e. price stability versus financial stability). The US Fed chose the former with [its most recent] 25 basis point (bps) rate hike, though its tone signalled a dovish hike. Despite increasing attention on the latter, we believe the former still remains on the top list of the MAS,” she adds.

Citi analyst Kit Wei Zheng says the outlook in MAS and MTI’s statement was still “broadly hawkish” despite the acknowledgement of lower oil prices. The outlook was also “possibly” still more hawkish than at MAS’s monetary policy statement (MPS) in October 2022.

“Whilst acknowledging the decline in energy prices, today’s outlook was far from dovish, and stressed that non-oil imported inflation will remain “relatively firm” for some time, given still elevated food prices, the added reference to still high core inflation in advanced BLZ economies, and resilient growth in Asia supporting regional inflation,” Kit points out.

“[The] outlook also dropped last month’s reference to the m-o-m step up in core due to the GST hike– which likely suggests officials saw no further pass-through of the hikes in Feb, further allaying concerns over second-round effects,” he adds.

In addition, the analyst suspects that the latest projections for core inflation to remain above 5% in the 1Q2023 is still higher than the projections at MAS’s October 2022 meeting where core inflation was pegged to stay around 5% in early 2023.

To this end, Kit has lowered his core inflation forecast to 4.1% from 4.2% previously. He has, however, kept his headline inflation forecast at 5.5%.

“Our estimates suggest limited further pass-through of the GST hike into core inflation in February, with cumulative pass through in January – February weaker or comparable to the January 2004 or July 2007 episodes, after which MAS steepened the slope,” he writes.

“Factoring in some rebound in airfares in March on increased demand from Chinese tourists and school holidays, alongside lingering pass through effects of the GST hike, we now expect March core CPI to slow to 5.2% y-o-y in March, bringing 1Q2023 core to average 5.4%, just 10 bps below MAS’s end October forecast of 5.5%, though likely still [around] 20 bps higher than its mid-October MPS forecast of ‘around 5%’,” Kit adds.

Amid the lower import prices but stickier service prices, Kit is expecting Singapore’s core inflation to moderate further to 4.6% in 2Q2023, 3.4% in 3Q2023, 3% in 4Q2023 and 2.9% in 2024.

“While MAS will likely keep its full-year 2023 core forecast range unchanged at 3.5-4.5%, our latest forecasts are between 10-20 bps higher than MAS’s October forecast for 1H2023, and 50-70 bps higher in 2H2023, implying a less discernible slowdown in core than MAS had forecast in October. We see headline averaging 6.3% in 1Q2023, moderating to 5.5% in 2Q2023, and averaging 4.9% in 3Q2023 and 5.2% in 4Q2023, averaging 4.7% in 2024.”

“With inflation likely to stay high for longer despite uncertainty from tighter global financial conditions, we still see a gradual 50 bps slope steepening to 2% per annum (p.a.) in April as our base case (60% probability), even as the risk of a pause (40%) remains high,” says Kit.

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