Chart of the Day: Singapore inflation pegged to hit 2.8%

As wage hikes will be offset.

According to Nomura, against this backdrop, they see downside risks to the official 1-3% growth forecast.

"We see a lot of scope for the MAS to be disappointed from releases of activity data in the coming months, which could force it to reduce its growth assessment in the run-up to the next policy announcement in October," Nomura said in a report.

Here's more from Nomura:

In fact, we think there is a high risk of a downward revision to the actual Q1 GDP data next month, given that manufacturing sector growth in the flash estimates implies a very strong rebound in March IP.

On the inflation outlook, the MAS reduced its headline CPI forecast to 3-4% from 3.5-4.5%, in line with our expectations. This reflects its expectations that rental prices will contribute less due to increased housing supply and car prices will contribute less due to recent administrative measures.

However, more surprisingly, the MAS also reduced its forecast for underlying inflation to 1.5-2.5% from 2-3%, following lower-than-expected readings over the last few months and the lower-than-expected pass-through from the tight labor market to consumer prices.

We maintain our CPI inflation forecast at 2.8% and core inflation at 1.6%, as we think the wage cost increases will likely be more than offset by still-falling imported inflation and given a still-weak domestic economy.

Given how inflation and inflation expectations have been a more important driver to recent MAS policy decisions, we think its reduction of both core and headline inflation forecasts makes an easing in FX policy possible.

In addition, SGD now looks too strong relative to regional peers, which is partly why Singapore‟s imported price inflation is declining more than in other commodity-importing countries (e.g., Thailand).