Why MAS holds on to muted domestic demand outlook

This is despite uptick in headline CPI.

Slight pick-up in February headline CPI to 0.7% year-on-year (January: 0.6%) on private transport was observed. According to Citi, this was in line with consensus, though Core eased more-than-expected to 1.2% (consensus: 1.3%, January: 1.5%).

The rise in headline CPI was led by a 7.1% yoy jump in private road transport on base effects (February 2016: -3.7%). Services CPI fell on lower airfares and more moderate increase in holiday expenses, whilst food CPI slowed on moderation in non-cooked amidst moving holiday effects (CNY fell in February last year, leading to higher food prices).

Accommodation costs remained weak and edged down 0.1%-pt amidst ongoing softness in the rental market.

Here’s more from Citi:

MAS/MTI maintains view of subdued domestic demand amidst energy and administrative-induced price pressures. MAS’s CPI outlook was unchanged from February’s, with modest rises in imported inflation expected amidst a muted outlook on domestic sources of inflation pressures.

Upstream disinflationary undercurrents are expected to persist, as ‘slackened’ labour market conditions caps underlying wage growth even as non-labour business costs have eased. MAS continued to note that the expected pick-up in 2017 headline and Core CPI would reflect largely the positive contribution from admin. measures and the expected rise in energy-related components, “rather than generalised demand-induced price pressures”.

Whilst our estimates suggest that water tariff hikes would raise core CPI directly by around 0.1%-pt with effect from July, this merely reduces the extent of inflation undershooting MAS’s implicit forecasts in October.

However, upside risks come from any associated rise in inflation expectations, which have historically had a strong impact on actual CPI. All in, MAS continues to see headline CPI averaging 0.5-1.5% and core at 1-2% in 2017, in line with its implicit forecast of 1.5% as at October MR.

Whilst the mild step-up in external demand in 4Q16 has introduced upside risks to MAS’s October baseline GDP forecasts and renders a downward re-centring unlikely, we do not see compelling reasons for an April tightening.