Hawkish MAS signals strong inflation outlook
? As widely expected, the MAS tightened monetary policy for the third
consecutive time, by steepening and re-centreing the S$NEER slope.
? With inflationary pressures coming in strong from oil, food, accommodation
and automobiles, the MAS has raised its 2022F inflation forecast to 4.5-5.5%.
? Separately, Singapore’s GDP grew by 3.4% yoy in 1Q22 via positive gains in
all industries; our 2022F forecast of 4.2% remains intact despite global risks.
First-ever triple consecutive slope steepening by the MAS
In today’s Monetary Policy Statement (MPS), the Monetary Authority of Singapore (MAS)
announced a tightening of the monetary policy in two ways: 1) the MAS will re-centre the
mid-point of the S$NEER policy band to the prevailing level, and 2) increase slightly the
rate of appreciation of the policy band. We already projected a tightening move, in line with
market expectations, although only half of market respondents expected the mid-point to
be re-centred. While the MAS does not publicise the exact change in the slope of the
currency band, we project it to have been increased to 1.5% p.a. compared to a change to
1.0% in Jan judging by the similar use of the word “slightly” over the past three statements.
Oil, food, cars and housing to drive near-term inflation
MAS’s outlook for inflation has risen significantly. It increased its CPI growth projection to
average between 4.5-5.5% yoy in 2022F vs. the 2.5-3.5% projection in Jan, with Core
Inflation at 2.5-3.5% vs. the 2.0-3.0% in Jan. In the MPS, it argued for the supply-side
factors to inflation, stating that “sharply higher global commodity prices since late February
and renewed supply chain disruptions brought about by both the Ukraine war and the
pandemic will exacerbate pre-existing inflationary pressures”. However, the MAS also
argued on the robust strength of the demand side factors, as the economy is running
“above trend” with a soon-to-be “positive output gap”. From our perspective, we concur
with the MAS’s assessments due to several factors:
? Commodity prices still high. Oil prices have eased but continue to trade at levels
of over-US$100/bbl. Yesterday, the IEA said that OPEC+ members have only
managed to provide just 10% of the supply increase scheduled for Mar, indicating that
it may be several quarters before oil prices show strong signs of easing. In terms of
fresh food, the monthly FAO Food Price Index (FFPI) released last Friday showed a
mom increase of 12.6% in Mar, with the increases in vegetable oils, cereals, and meat
sub-indices hitting all-time highs.
? COE contribution to remain significant. The Prevailing Quota Premium in
Singapore ticked higher in both Mar and Apr to register a 43% and 50% yoy increases
respectively. This means that even though we expect COE premiums to cool off and
plateau later this year, we also expect this to be quite a few more months away,
keeping private transportation costs elevated.
? Finally, accommodation costs should remain elevated as there is an existing
backlog of delayed residential projects. Moreover, the influx of foreigners amidst a
major reopening is likely to drive rental prices up further.
Earlier, we projected CPI growth at 3.2% yoy for 2022. However, given a more persistent
global price increase and the possible second round effects to domestic inflation, we are
putting our inflation forecast under review for now.
GDP grows 3.4% yoy in 1Q22 via positive gains in all industries
Released simultaneously, Singapore’s GDP expanded by 3.4% yoy in 1Q22 (vs. +6.1%
yoy in 4Q21). This is weaker than market expectations of 3.8% but better than ours at 3.2%.
On a seasonally adjusted (SA) basis, however, GDP expanded a lukewarm 0.4% qoq SA.
We suspect the weakness was due to more seasonal elements such as biomedical and
transport engineering. Going forward, we project a stronger economic momentum despite
the tightening move. Our 2Q22 GDP forecast is higher at 4.8%, driven by a broader
economic recovery, supported by continued border reopening. Meanwhile, our 2022 GDP
growth forecast is intact at 4.2% yoy.