MAS acts to nip inflation in the bud
? This morning, the MAS surprised markets by announcing a “slight raise” to the S$NEER slope, despite having done so just three months ago.
? Although 60% of 2021’s CPI was driven cars & petrol, the Dec 2021 core inflation breach of MAS’s target of “just under 2%” prompted them into action.
? The divergence between the CPI and PPI in Singapore reached its highest this century; we predict no change to the S$NEER slope in Apr 2022.
S$NEER slope raised to combat near eight-year core inflation high
This morning, the Monetary Authority of Singapore (MAS) surprised markets by releasing an off-cycle monetary policy announcement, announcing a “slight raise” to the S$NEER slope, despite having done so just three months ago on 14 Oct 2021. The unforeseen tightening of monetary policy by the MAS comes just one day after the release of record-breaking Dec 21 headline and MAS core CPI numbers that reached new near nine-year and near eight-year highs, respectively. This is only the third time the MAS has released an off-cycle monetary policy announcement since the beginning of this century (the same time it began its semi-annual reporting cycle). The last time the MAS released an off-cycle announcement was in Jan 2015, when it reduced the slope of the S$NEER as a result of a very sudden tepid turn in global oil prices (Brent Crude: down almost 60% from Jun 2014 to Jan 2015), leading to a change in the inflationary outlook.
Top 20% income earners burdened with the largest CPI increase
Singapore’s headline inflation accelerated for the fifth consecutive month in Dec 21, reaching 4.0% yoy (vs. +3.8% yoy in Nov 21), its highest since Feb 2013 (+4.9% yoy). However, the story very much matches what we had been seeing since the beginning of 2Q21: the majority of the headline inflation has been driven by the cost of private transportation (cars and petrol). 48% Dec’s headline inflation can be attributed to the rise in private transportation alone, a decrease from 57% in Nov, due to core inflation gaining significant momentum. As owning private cars is typically the preserve of the top earners in Singapore who can afford the hefty COE premiums, the middle 60% and bottom 20% of income earners in Singapore experienced more muted headline inflation than 2021’s average of 2.3% (please see Fig. 3). We expect the surge in private transportation inflation in 2021 to ease over the course of 2022F as a result of cooling COE premiums and an appreciating S$NEER that lowers the cost of imported petrol.
Core inflation was a loaded spring throughout 2021
The MAS Core Inflation accelerated to 2.1% yoy in Dec 21, its sixth consecutive month of acceleration, bringing it above the MAS’s target inflation of “just under 2%” and its highest level since Jul 2014 (+2.2%). It was always well known that core inflation was a spring that was waiting to unload. If we look at the Domestic Supply Price Index (DSPI) for Singapore vs. core inflation, we see a stark and strong divergence occurring since the beginning of 2Q21 (see Fig. 7). The difference between the CPI and PPI has reached its highest levels this century for not only Singapore, but also the US and China as well (see Fig. on left). As 88% of the total population has received their full vaccine regimen and the annual GDP has surpassed pre-pandemic levels, the more positive outlook presents a timely opportunity for businesses that have suffered months of elevated input costs to pass on these costs in higher prices to end-consumers. We expect core inflation to continue to rise in the coming months before decreasing in the second half of this year.
We do not expect a triple consecutive tightening by MAS in Apr 22
Contained within the MAS’s statement this morning was also an upgrade in their headline inflation forecast from 1.5-2.5% (CGS-CIMB: 3.0%) to 2.5-3.5%, and core inflation from 1- 2% to 2-3% (CGS-CIMB: 2.4%). The MAS has never done a triple consecutive slope raise in history, and we do not expect them to do so this time around. We believe that the Oct 2021 and Jan 2022 slope raises should be impactful enough for both the economy and the markets, and clearly signal MAS’s intentions regarding inflation.