Singapore may need more fiscal, monetary policy action to check runaway prices: Analysts

Apr 25, 2022

SINGAPORE may have to take further fiscal and monetary policy action to curb runaway prices, some analysts warned on Monday (Apr 25), as inflation surged to a decade high.

Rising global energy prices are set to fuel inflation - taking a toll on private transport costs from petrol pump prices, as well as driving up electricity and gas expenses - while accommodation expenses are tipped to keep rising from firm rental demand domestically.

Nicholas Mapa, senior economist at ING, said in a note the Monetary Authority of Singapore (MAS) “could resort to additional off-cycle adjustments” should core inflation threaten to bust the ceiling of the central bank’s latest forecast range.

Meanwhile, Maybank senior economist Chua Hak Bin told The Business Times that price gains are outpacing wages for most households, even as wage pressures “will eat into business profit margins and may force some firms into financial distress” despite a post-pandemic reopening.

“Currency appreciation may not be sufficient to contain the intensifying inflation pressures nor ease the tightness in the labour market,” he and economist Lee Ju Ye wrote in a separate note.

Singapore may have to defer manpower policies that will curb foreign worker inflows and raise local salaries, and “a supplementary Budget may be necessary to ease the burden from the rising cost of living for lower-income households”, they said.

The headline consumer price index reading grew to 5.4 per cent in March, from 4.3 per cent before, while core inflation - an MAS metric that strips out private transport and accommodation costs - rose to 2.9 per cent, from 2.2 per cent in February.

Private transport costs were up by 21.5 per cent in March, from 17.2 per cent before, while accommodation expenses rose by 3.5 per cent, from 3.3 per cent previously.

Headline inflation now stands at 4.6 per cent for the first three months of 2022, and core inflation is 2.5 per cent. The Maybank team believes that core inflation will breach the 3 per cent mark in the second quarter, with headline inflation above 5 per cent.

The latest print came less than a fortnight after the MAS tightened Singapore dollar nominal effective exchange rate (S$NEER) policy settings and hiked full-year inflation estimates.

“With price pressures expected to persist in the near term, we believe the MAS will retain its hawkish bias even after the string of rate increases carried out over the past few months,” said Mapa, who thinks “surging core inflation will likely keep the MAS on its toes”.

Yet, he and OCBC chief economist Selena Ling were both concerned about the risk posed by slowing global growth. Ling noted that frontloading monetary policy to tackle imported inflation could risk a stagflation situation, if demand and growth end up moderating from weaker business and consumer confidence amid the elevated prices.

Other watchers, such as UOB economist Barnabas Gan, are thus looking to the MAS’s next meeting in October to rein in inflation by steepening the S$NEER slope.

“While demand-pull price pressures are likely to stay elevated due to tight labour-market conditions, they are unlikely to rise to levels that favour a more aggressive pace of adjustments,” added Barclays economist Brian Tan, who also expects a tighter slope in October.

He said that labour market conditions “should also eventually come under control as international travel normalises and more non-resident workers find employment in Singapore, reducing the need for a significantly steeper slope or an aggressive pace of adjustments”.

Tan, who said that the latest surge in core inflation came on a broad base, noted: “Domestic food prices are likely catching up with the earlier surge in global food prices and will likely continue to be pressured higher over the next few months.”

Said Gan: “Given the supply chain disruption and higher oil prices, we also expect food inflation to trend higher into the year to as high as 3.9 per cent year on year at end-2022, while transport costs will likely grow at double-digit rate for the most part of this year.”

The MAS and MTI said in a joint statement that external inflationary pressures have intensified as the war in Ukraine and “regional pandemic situation” - a possible allusion to lockdowns in China - have worsened global commodity price spikes and supply chain disruptions.

Domestically, the “greater pass‐through of accumulating business costs to consumer prices is likely to occur, keeping core inflation significantly above its historical average through the year” as demand improves, the MAS and MTI also said.

The MAS has projected headline inflation to fall between 4.5 per cent and 5.5 per cent in 2022, while core inflation is expected to average between 2.5 per cent and 3.5 per cent.





https://www.businesstimes.com.sg/gov...runaway-prices