Update: Quick takes: Weak Aug inflation may induce dovish biasness in MAS policy

By

Angela Tanangelat@sph.com.sg

SEP 23, 20152:49 PM

Singapore inflation eased 0.8 per cent in August compared to a 0.4 per cent slide in July, mainly due to the lower cost of private vehicles as the Certificate of Entitlement (COE) premiums eased.

MAS Core Inflation, which excludes the costs of accommodation and private road transport, moderated to 0.2 per cent from 0.4 per cent in July, reflecting lower services and retail goods inflation.

Here are some quick thoughts:

Weiwen Ng, economist (ASEAN and Pacific) at ANZ Research:

"Core inflation eases in line with our expectations, but does little to assuage MAS' conundrum. Easing monetary conditions may appear to be an attractive orthodox policy when the MAS next meets in October, particularly with growth undershooting and core inflation still benign (for now)."

"However, an easing in S$NEER would exacerbate the extent of rate rises, resulting in higher debt-servicing costs for households. This dynamic, in addition to MAS' focus on cost pressures arising from a tight labour market, would constrain MAS's policy response."

Francis Tan, economist, UOB:

"Singapore's headline inflation contracted for the tenth consecutive month to register -0.8 per cent year-on-year (+0.1 per cent month-on-month NSA) in the month of August. The weak August number also surprised consensus estimates of a 0.6 per cent yearon-year contraction on the downside."

"This is also the lowest headline inflation rate since the global financial crisis six years ago, and marks the longest stretch of "deflation" since the last "deflationary period" back in Jun-Dec 2009, when consumer prices in Singapore fell from both the lack of consumer demand as well as corporate/business price-cutting in the aftermath of the global financial crisis."

"Today's inflation report is the final one before the central bank decides on the monetary policy during their bi-annual policy meeting in October (we are expecting the meeting to be held between 12-14 October). The continued weakness in core inflation may induce some dovish biasness in the eventual policy decision."

"In fact, since the last inflation report (issued on 24 Aug), the MAS changed tack, and warned that 2015 core inflation risks coming in at the lower end of their 0.5 per cent to 1.5 per cent forecast range.

"As such, we are of the view that the MAS may execute a one-off downward shift in the SGD NEER midpoint by 1 per cent. On the other hand, we do not think that current conditions justify any changes to the SGD NEER slope (estimated by us to be 1 per cent per annum), as well as the bandwidth. We maintain our USD/SGD forecast of 1.43/USD by end of 2015.''