Deflation tightens its grip on Singapore as CPI crashes to six-year low

What does this mean for MAS policy?

Singapore dipped further into deflation in the month August, with the consumer price index slipping to its lowest level since the Global Financial Crisis. Analysts are mixed on whether the persistently weak inflation data will push the Monetary Authority of Singapore (MAS) to loosen monetary policy again in its October meeting.

The city-state’s CPI dipped 0.8% in August, worse than consensus expectations of a 0.6% contraction. Meanwhile, the MAS All-Items Inflation--which excludes accommodation and transport costs--gained by a mere 0.2% last month, below July’s 0.4% growth.

Some, such as UOB economist Francis Tan, believes that the MAS may choose to shift the SGD nominal effective exchange rate (NEER) downwards in order to address falling CPI.

“We are of the view that the MAS may execute a one-off downward shift in the SGD NEER midpoint by 1%. 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% pa), as well as the bandwidth,” Tan noted in a report.

Still others, such as HSBC Economist Joseph Incalcaterra, said that the negative headline inflation print alone will be insufficient to warrant another easing.

“While this is likely to fuel expectations of policy easing by the MAS, the short-term inflationoutlook ultimately matters little for the central bank. After all, it already expects disinflation to continue, but remains fixated on expectations of a rise in core CPI next year, suggesting it will maintain its current policy settings,” said the report.