Will steady disinflation lead to policy loosening in Singapore?

The MAS is unlikely to budge.

Singapore’s headline inflation has decreased significantly in 2014. The headline figure is now tracking at 1.3%, considerably lower than the 2.4% recorded in 2013. This has been driven by lower imputed rents and COEs.

Benign inflation has caused some analysts to speculate about potential policy loosening by the Monetary Authority of Singapore, but Macquarie Research notes that the central bank is unlikely to budge next year.

“We do not expect policy loosening. The MAS last loosened in October 2011 against a very poor
international macro backdrop and with Core inflation in the low 2% range. If they didn’t loosen then, we think the odds of loosening now are also low,” Macquarie stated.

Here’s more from the report:
Inflation subsequently picked up, and with tail risks receding, MAS tightened again in April 2012. It has kept its policy steady since (modest and gradual appreciation) citing wage inflation as a pressure point.

This period of policy consistency includes a period in 2012, when GDP growth was weaker than we are seeing today and inflation averaged 2.6%, which is in line with the ‘elevated’ level MAS expects for 2015 (2.0-3.0%).
Our FICC team sees SGD trading at ~1.30-1.32 through 1H15 after which it could strengthen on the back of muted US rate hikes.

Big picture, we sense the MAS is comfortable with the pace of economic transition, in spite of the flatlining productivity. For example, as it explains in its recent Macroeconomic Review: “A secular shift to higher margin production is evident within the manufacturing sector as it responds to resource constraints.” Implicit in MAS’ commentary is acknowledgement that the process will take time, keeping core inflation elevated.