Economists expect further monetary policy tightening in April, 6 months after last round

Nov 24, 2021

A FURTHER tightening of monetary policy just 6 months after the last round should not be discounted, with Singapore's inflation in October appearing to accelerate, economists have said.

Headline inflation rose to 3.2 per cent last month, compared with 2.5 per cent in September, going by data from the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) on Tuesday (Nov 23). The last time headline inflation crossed the 3 per cent mark was in March 2013.

Core inflation, which excludes accommodation and private transport, rose to 1.5 per cent in October - the highest level in 3 years - from 1.2 per cent in the previous month.

These readings surprised private-sector economists, who had predicted headline inflation to come in at 2.8 per cent, and core inflation, at 1.3 per cent, a Bloomberg poll found.

Core inflation rose on the back of higher services and food inflation, as well as a smaller decline in the cost of retail and other goods.

Meanwhile, headline inflation reflected stronger private transport and accommodation inflation alongside core inflation.

In a statement, MAS and MTI kept their inflation outlook, pointing out that the elevated global inflation is likely to persist amid higher crude oil prices and strengthening demand.

Domestically, the labour market recovery is expected to become "more entrenched" as Covid-19 restrictions ease and wages rise in tandem with the dissipating slack in the labour market, they added.

The official core inflation forecast remains at the upper end of the 0 to 1 per cent range, while headline inflation is expected to be about 2 per cent.

OCBC chief economist Selena Ling said MAS' decision to pre-emptively tighten monetary policy settings by slightly raising the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band appears "prescient".

With the upside surprise in October, a legitimate concern is whether there is a need to "front-load" the policy tightening, especially since the policy review occurs twice a year, she said.

"While there is a need to be watchful about the inflation overshoot and the potential entrenching of inflationary expectations, there is no need to jump the gun and worry about an inter-meeting MAS move at this juncture as the core CPI print is still within the 1 to 2 per cent range tipped for 2022," she added.

"That said, it is likely that the April 2022 monetary policy review is likely to warrant another tightening again."

Economists from Barclays, Citi, Maybank Kim Eng, JP Morgan and UOB concurred, due to the stronger-than-expected core inflation.

Said Citi economists: "The 'slight' 50 basis point (bp) slope steepening in October still leaves policy settings relatively accommodative, with the 'neutral' policy path hugging the band ceiling till April 2022. But a further reduction or elimination of policy accommodation might be necessary, especially once the output gap closes around mid-2022."

This is especially so if the widely anticipated Goods and Services Tax (GST) hike coincides with a positive output gap, they said, adding that such a scenario could call for more aggressive tightening in October 2022.

"Assuming a full pass through of the GST hike into core inflation, a complete elimination of policy accommodation will likely require a further 100 to 200 bp upward recentring, in addition to a steeper slope," Citi said.

DBS senior economist Irvin Seah believes MAS can afford to take a "wait-and-see" approach and stand pat in April, given that it takes time for the October review to take effect. Inflation could ease in the coming months because of base effect, as the economy was in recession and seeing disinflation this time last year, he said.

The second half of 2022 is a different story, however. Seah said: "That's when the economic recovery will be even stronger, the output gap will turn even more positive, the labour market will improve further, and that's where the domestic inflationary pressure will start to build up, and this, compounded by this ongoing steady build-up in global inflationary pressure, is just going to push inflation significantly higher." He predicts the 2 per cent GST hike to kick in by July.

Barclays regional economist Brian Tan believes the GST could be introduced in April, and this could lead to core inflation exceeding its historical average of about 2 per cent the same month. Maybank Kim Eng economists said they are not expecting the government to raise the GST next year, since this could drive inflation to test 5 per cent.

Still, inflation in 2022 will be higher and core CPI could test 2 per cent in Q1, as border reopenings push up travel-related costs while the recovery in domestic demand raises retail and service costs, they said.