Brace for more price hikes amidst possible MAS tightening

The MAS could now tighten its policy in 2018 in a bid to ensure that headline inflation remains within its range of 0-1%.

Singapore should brace itself for more price hikes, BMI Research said, as inflationary pressures are piling up that could now lead to Monetary Authority of Singapore (MAS) tightening. According to a report, with inflation likely to tick higher amid the government’s expansionary budget announced in late February, the MAS could now tighten its policy in 2018 in a bid to ensure that headline inflation remains within its range of 0-1%.

Inflationary pressures are piling up. BMI Research noted that the government’s expansionary budget will likely present additional upside pressures. “In the budget, the government stated that it would increase spending in areas pertaining to creating a vibrant and livable economy as well as green technologies whilst reiterating its commitment to large-scale projects such as Changi Airport Terminal 5. In addition, Finance Minister Heng Swee Keat also announced the hiking of tobacco excise duties across all tobacco products by 10%, effective February 19,” the team said.

Moreover, rising underlying price pressures are likely to translate into higher headline figures over the coming months. “Our Oil and Gas team expects Brent to remain on an uptrend, averaging US$67/bbl in 2018 compared with US$54.8/bbl in 2017 whilst our Agribusiness team expects rice prices to trend higher in 2018, averaging US$12.0/cwt (versus consensus forecasts of US$11.4/cwt). Being a net importer of refined fuels and almost all of its food, we expect higher global prices to feed into higher inflation and believe that this will have an impact on both the transport as well as the food and beverage sectors,” BMI Research added.

Utility and electricity prices are also likely to rise over the coming quarters due to the government’s policy and higher natural gas prices. BMI Research added, “It was announced in December 2017 that electricity tariffs would rise by an average of 6.3% per kilowatt hour in Q1 2018 due to higher natural gas prices. Water prices are also set to rise by 30% in July. These factors suggest that inflation could tick higher before H218, prompting the MAS to tighten policy over the coming months in a bid to contain inflation, informing our forecast for inflation to average 1.3% in 2018.”

Despite the higher inflationary pressures, economic growth still remains within the government’s range. A new survey said Singapore economists expect real GDP growth to come in at 3.2% in 2018, up from the average of 3% in December 2017.

“Whilst we maintain our real GDP forecast of 3.0% amidst the slowing of the manufacturing sector, growth remains within the targeted band, which will enable the MAS to tighten policy without fears of undermining growth,” the team said.

BMI Research now expects the Singapore dollar will curb imported inflation.
In its last monetary policy meeting in October 2017, the MAS noted that it would “maintain the rate of appreciation of the S$NEER policy band at zero percent” and that “the width of the policy band and the level at which it is centred will be unchanged.”

BMI Research cited a statement in mid-February, Jacqueline Loh, deputy managing director of the MAS, noted that the central bank had not changed core or headline inflation forecasts since October and that the ‘monetary policy stance remains as announced then’.

“We had previously noted that the removal of the phrase ‘for an extended period’ from the statement ‘MAS had indicated in the October 2016 MPS that the neutral policy stance would be appropriate for an extended period’ in October 2017 is likely to signal the start of the central bank’s tightening cycle. Given that the central bank has not changed its core or headline inflation targets amid growing inflationary pressures, we believe that it will likely tighten its SGD policy to curb inflation,” it added.