Home MarketsAsia Singapore inflation may have eased slightly, but the central bank warns the pain is likely to remain

Singapore inflation may have eased slightly, but the central bank warns the pain is likely to remain

by SuperiorInvest

Singapore skyline from Merlion Park on May 15, 2020.

Roslan Rahman | AFP | Getty Images

Singapore’s economy is likely to face the lingering pain of global financial worries, even though the country’s core inflation eased somewhat in October.

The Monetary Authority of Singapore warned of long-term risk factors piling up on the country’s financial vulnerabilities in the corporate, housing and banking sectors – citing weakening demand and lingering inflationary pressures.

“Amid weakening external demand, Singapore’s economy is expected to slow to a below-trend pace in 2023,” the central bank said in its latest Overview of financial stability message. “Inflation is expected to remain high, supported by a strong labor market and the continued projection of high imported inflation.”

The central bank has warned of the risk of contagion from global markets, saying the nation’s corporate, domestic and financial sectors should “remain cautious” amid macroeconomic challenges ahead.

“The most immediate risk is potential dysfunction in key international funding markets and cascading stress on the liquidity of non-bank financial institutions that could quickly spill over to banks and corporates,” the company said.

The news comes days after the country reported some easing of inflationary pressures for October. While still at 14-year highs, Singapore’s consumer price index rose 5.1% for the month from a year earlier, down slightly from September’s 5.3%.

Singapore does not have an explicit inflation target, but the MAS sees core inflation of 2% as broadly reflective “overall price stability.” The country’s October core CPI is also well above that level, as is the central bank’s forecast for inflation of “around 4%” for 2022.

JPMorgan analysts said that while they expect core inflation levels to remain elevated through the first quarter of next year, they forecast that subsequent data will show further easing. This would leave room for the central bank to step back from its hawkish stance.

“If this forecast comes true, it would indicate little need for MAS to tighten its NEER policy next year,” the firm said in a note.

Peak hawk?

Minutes from the Federal Reserve’s latest meeting released this week said a smaller interest rate hike was expected “soon” — suggesting its global peers, including the MAS, could also take a break from their own tightening cycles.

“The MAS is also in a similar position – it tightened monetary policy a lot in 2022 and will want to see how the impact plays out,” said BofA Securities ASEAN economist Mohamed Faiz Nagutha.

“This means that further tightening is not a given, but also cannot be ruled out at this point,” he said.

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However, Nagutha emphasized that the increased inflation will continue to spread for a while.

“In our view, the MAS will not declare this a success any time soon,” he said.

IG market strategist Jun Rong Yeap said this also applies to MAS partners in Asia Pacific.

Although global central banks such as the Reserve Bank of Australia and the Bank of Korea have taken smaller steps to raise interest rates, inflation will remain the main target, he said.

“Persistence of price pressures could still lead to a reassessment of how high or how long interest rates will need to be in restrictive territory,” he said. “And that will come with a greater trade-off for growth.”

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