Singapore's 3.5% inflation is 'solid, 29-month low': analyst

And it's still going to ease further.

According to a commentary by DBS, inflation dipped sharply as expected and this makes for a revision of our full year inflation forecast. The headline number fell to 3.5% YoY (DBSf: 3.6%), the lowest level since October 2010. That is a solid 29-month low.

"And in line with our expectation, it is largely driven by the recent corrections in the COE premiums after the Monetary Authority of Singapore (MAS) tightened the financing terms for car loans," DBS said.

Essentially, cars with an Open Market Value (OMV) that does not exceed SGD 20,000 will now face a maximum loan to value (LTV) of 60%.

Here's more from DBS:

For a motor vehicle with OMV of more than SGD 20,000, the maximum LTV is now 50%. This is down from a maximum LTV of 100% previously. Furthermore, the tenure for vehicle loan has also been capped at 5 years.

These changes essentially imply substantially more cash up-front for consumers, which in effect, will slam the brakes on car demand and COEs.

This is the main reason why COE premiums have fallen sharply and thereby creating the significant knock-on effect on CPI inflation. Note that private transport cost accounts for 11.66% of the entire CPI basket and the bulk of the swings in this sub-index are driven by the COEs.

So, will inflation ease further? Of course it will. While MAS has temporarily lifted the financing curbs to allow car dealers to clear off their existing stocks that were purchased based on the previous financing terms, and COE premiums have recovered partially, most consumers are expected to stay on the sidelines waiting for car prices and COE premiums to fall further.

The market is going through an adjustment period before a new equilibrium can be reached. That implies slower sales and hence, more easing in car prices in the coming months.

Indeed, we expect inflation to ease further towards the 3.0% mark in the middle of the year before inching gradually back to 4% by the end of the year. Wage pressure and still high underlying business cost are expected to keep inflation elevated.

But factoring in the effect of the COE premiums on inflation, full year inflation is now expected to average 3.6%, against our earlier projection of 4.0%.