Citi Research analysts Kit Wei Zheng and Jester Koh believe that the Monetary Authority of Singapore (MAS) is likely to raise 2022 core forecasts by 50 basis points (bps) to around 4%, with a “60% probability” of an upward re-centring of at least 100bps and a concurrent 50bps slope steepening to 2% per annum in Oct.
In their report dated Sept 17, the analysts write that 3Q2022 gross domestic product (GDP) likely rebounded sequentially — at 0.7% q-o-q on a seasonally adjusted basis, exceeding growth rates preceding the April and July re-centring episodes and close to trend — with the output gap likely still mildly positive into 2023.
“While external demand headwinds continue to cloud the outlook, [GDP] has not deteriorated further since July, with MAS likely not expecting a hard landing in its baseline scenario. 2023 growth is likely seen close to trend, and as such, the output gap is likely seen remaining mildly positive, or at least not turn negative, similar to in April and July,” say Kit and Koh.
Meanwhile, some easing from record job market tightness is expected, but they also see labour costs persisting into 2023. “The job market remained at record levels of tightness in 2Q22, with most indicators exceeding levels in past re-centring episodes, despite some moderation in job vacancies and wage growth. Tightness could ease on foreign worker inflows and external headwinds, but labour cost pressures could persist into 2023, on policy measures, and a cyclical slowdown in productivity,” they say.
With 2023 core and headline inflation still seen elevated at 3% to 4% and given the upside surprises in June and July to the core consumer price index (CPI) and the pass-through of earlier shocks, MAS likely now sees core inflation averaging near 5% in 3Q2022 and 4Q2022. This is 75bps to 125bps higher than its July forecasts, albeit with “moderating momentum”, they note.
“Any hike in electricity tariffs in 4Q2022 on LNG price spikes would further raise 4Q2022 inflation. For 2023, the 1% point GST hike could add up to 80bps to core [inflation] and 70bps to headline [inflation], adding on to continued pass-through of labour costs and other administered prices”, say Kit and Koh.
The expected hike in 2H2022 for quarterly core projections compared to July is larger than the “upward re-centring episodes” seen in April and July this year, with elevated 2023 forecasts historically more consistent with a slope of at least 2%, they add.
On top of that, the Citi analysts believe that there is a 60% chance that restoring and maintaining tight real policy settings into 2023 will call for at least 100bps upward re-centring and concurrent 50bps slope steepening.
Say Kit and Koh: “With the neutral nominal effective exchange rate (NEER) path raised by 100bps on recent inflation surprises, an upward re-centring of 100bps will fully restore near term policy real settings to levels anticipated at the Jul MPS, with a 150-200bps recentring implying further tightening. A concurrent 50bps slope steepening will maintain these settings into 2023.”
According to them, tightening may need to be more “front loaded and persistent” to slow inflation momentum before the GST hike on Jan 1 next year, with short term exchange rate pass-through possibly dampened by the sizable share of imports invoiced in USD and SGD.
“Factoring in elevated global inflation and the ratio of tradables to non-tradables productivity, our calculations suggest an estimated 6% appreciation of the NEER in 2022 would be consistent with the implicit domestic inflation ‘target’ and equilibrium real exchange rate, moderating only slightly to 3.5% to 4% in 2023, which may partly explain the consecutive upward re-centring moves taken so far this year,” they add.
Risks to the Citi analyst’s projections are for either only a re-centring or a 100bps steepening, depending on the extent to which MAS responds to recent upside inflation surprises.