MAS needs to stretch and flex: Morgan Stanley

The bank warns that accommodation inflation will accelerate in 2011.

It added that MAS’ policy response will need to deal with increased uncertainty both on the inflation and growth front as inflation forecast for 2011 has been revised from 2.7% YoY to 4.2%.

The inflation rate for 2012, meanwhile, has been changed from 2.7% YoY to 2.3%

In a statement, Morgan Stanley said while that the economic data for January points to inflation peaking in 1Q11, the inflation trajectory is “likely to be bumpy.”

The recently released Jan-11 inflation data show January headline inflation reaching +5.5% YoY (vs. +4.6% YoY in December 2010), a 26-month high. The figure is above consensus expectations of 4.4% YoY.

“Accommodation inflation will accelerate whilst car inflation should decelerate… [Also,] inflation should follow a broad deceleration path in the course of 2011, though we expect headline inflation to stay significantly above the 1.5%-2.0% historical trend average,” the bank said.

Morgan Stanley has factored in an average oil price of US$110/bbl for 2011 and 2012 and warned about energy and food inflation peaks in 2Q11.

Although MAS is seen to implement a one-off upward recentering in the April review following the latest economic developments, Morgan Stanley thinks a widening of the policy band is more likely.

“With upcoming elections, the raising of the upper band allows more room for near-term appreciation which will help policymakers cope with upside inflation risks given the supply shocks. On the other hand, the lowering of the lower band will help policymakers to cope with the increased growth uncertainty from the supply shocks and the demand-destruction it might bring,” the firm said.

Morgan Stanley added that the increased bandwidth will give policymakers the flexibility in dealing with “a fairly fluid macro environment” especially since MAS meets less frequently compared to other Central Banks.

The next MPC review will be another 6 months away.