- The MAS delivered a dovish tilt in its decision to maintain its SGD NEER policy parameters in July.
- The condition for future policy easing appears to reside in its cooling core inflation assumptions.
- We expect the underlying disinflation to continue in 2H24, barring unexpected shocks.
- We lower our headline and core inflation forecasts for 2024 to 2.4% and 2.9%.
- We see the door opening for USD/SGD to trade in a lower 1.32-1.34 range later in the year.
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The Monetary Authority of Singapore (MAS) delivered a dovish tilt in its decision to maintain the three parameters – slope, mid-point, and width of its SGD NEER policy band during its July 2024 review.
The condition for easing policy in the future appears to reside in its assumption that core inflation will decline discernibly in 4Q24 and to around 2% in 2025. A continued deceleration in core inflation could provide the MAS with some scope to reduce policy restriction, in line with global central bank easing in 2H24, and show conviction in ensuring medium-term price stability.
Continued inflation moderation
Singapore’s inflation has stayed on its easing path in 2024 despite a bumpy start to the year. Core inflation has evolved broadly in line with the MAS’s expectations, while headline inflation has been softer.
We expect the underlying disinflation to continue in 2H24, barring unexpected shocks. For 2024, we lower our headline and core inflation forecasts to 2.4% and 2.9%, respectively, from 2.8% and 3.1%.
Core inflation (which excludes private transport and accommodation but includes food and energy) cooled to 3.0% YoY in 2Q24 from 3.3% YoY in 1Q24. The dip to 2.9% YoY in June 2024 was the lowest in two years. While core inflation might look sticky on a YoY basis, propped up by various tax hikes and administrative price increases, various indicators that we track showed dampened core price momentum at the mid-year mark.
Our analysis is similar to the MAS’s assessment in its July statement. The MAS highlighted the sequential pace of price change to better capture the most recent inflation. It estimated a decline in the seasonally adjusted quarter-on-quarter core inflation to an annualised rate of 2.1% in 2Q24, amid moderate imported inflation and easing domestic cost pressures, with expectations for it to be lower in 2H24 vs. 1H24.
Two key factors inform our outlook for core inflation to ease further in 2H24. These are broadly in line with the MAS’s expectations, which would lower core inflation to its forecast of 2.5%-3.5% in 2024 and fall further to around 2% in 2025, from 4.2% in 2023.
First, we expect imported inflation to be tempered by contained global prices, and still restrained by the prevailing appreciation rate of the SGD NEER.
Second, we expect comparatively stickier core services inflation to continue its moderation from our estimate of 3.6% YoY in 2Q24. This will be due to reduced domestic cost pass-through to services consumer prices. Cost-push pressures in the services sector from the labour market are fading. Unit labour cost (ULC) growth for the sector has already softened significantly in 2024 compared to the past two years. Easing ULC growth in the services sector is helped by less tight labour market conditions, as seen from the fall in the job vacancy to unemployed person ratio from the peak of 2.5 in 2Q22.
The MAS lowered its headline inflation forecast for 2024 in the July review, which now stands at 2.0%-3.0% from 2.5%-3.5% previously. Headline inflation diverged and eased quicker than core inflation, decelerating to 2.8% YoY in 2Q24 from 3.0% YoY in 1Q24. This was mainly due to a much slower increase in private transport costs amid rising certificate of entitlement (COE) supply.
Door opening for a lower USD/SGD range
Given the MAS’s sanguine economic outlook and lower inflation projections, the SGD NEER has and should continue to hold in the upper half of the policy band. Per our model currently, this should keep USD/SGD below 1.35, or the level implied by the mid-point of the SGD NEER policy band.
Looking ahead, we see the door opening for USD/SGD to trade in a lower 1.32-1.34 range later in the year fuelled by the drop in Singapore’s core inflation and a weaker DXY from the two Fed cuts that we expect in the remainder of 2024.
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