Will Singapore’s worrying inflation remain high in 2012?

UBS gives us a breath of relief as it thinks inflation is likely to fall sharply in 2012 - but on what grounds?

According to UBS, the recent inflation figures out of Singapore have been discomforting for the government, populace and consensus forecasters alike. Inflation remains very high in a historical context and has dragged consensus forecasts for inflation in 2011 upwards from 2.6% in December 2010 to 5.1% in December 2011. It now threatens to do the same for 2012.

Here’s more from UBS:

Given this, it is not surprising that the government’s policy response has come on multiple levels. The MAS has appreciated the exchange rate to reduce demand for goods and services in Singapore. The government has, so far, introduced several successive rounds of property market measures to mitigate the undesired redistributive effects of inflation in that sector.

And in December the MAS answered questions in parliament as to whether the rise in the cost of car ownership certificates (Certificates of Entitlement) could be curtailed via restrictions on bank lending (the MAS said it could not).

So will inflation remain high in 2012 and should we expect further government policy measures to retard inflation? We think not.

Inflation is usually attributed to a combination of the economy’s capacity to supply goods and services relative to demand and, often associated with this, the excess supply of money or credit in the economy.

Strong demand growth and an ample supply of money or credit is usually a recipe for accelerating inflation. Likewise slower growth and tight credit usually implies decelerating inflation.

Given the slowdown in growth, we continue to believe a sharp fall in inflation is still on the cards in 2012. We also present a model of MAS behaviour given different growth and inflation outcomes. Our conclusion is that \policy easing no longer looks likely at the MAS’ April meeting.

Of note, Singapore’s real GDP growth is now clearly below average and while we do expect growth to trough on the year in Q1 2012, the acceleration we forecast will not take the four-quarter growth rate above its 5 year moving average until late 2012.

Moreover, we do not expect aggressive countercyclical policy from the government’s budget on 17 February and instead expect measures to boost productivity and cushion the unwelcome redistributive effects of recent price inflation.

Sitting close to the midpoint of the MAS’ policy band, the SGD is not priced for a change in policy. Near term, falling inflation could dent appreciation prospects. Upside pressures should grow stronger in H2 2012 once growth prospects clearly improve. We reiterate our forecast of USDSGD 1.20 by year end 2012.