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Singapore inflation may have eased slightly, but central bank warns pain may linger


Singapore skyline from Merlion Park on May 15, 2020.

Roslan Rahman | AFP | Getty Images

Singapore’s economy is expected to face continued headwinds from global financial concerns, even though the country’s core inflation eased somewhat in October.

The Monetary Authority of Singapore has warned of protracted risk factors building up on the country’s financial vulnerability in the corporate, housing and banking sectors, citing weakening demand and inflationary pressures persistent.

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

Warning of the risk of contagion from global markets, the central bank said the country’s corporate, household and financial sectors should “remain vigilant” in the face of the macroeconomic challenges ahead.

“The most immediate risk is a potential malfunction in major international funding markets and cascading liquidity strains on non-bank financial institutions that could quickly spill over to banks and businesses,” he said.

The report comes days after the country reported some loosening in inflation figures for October. Although still at 14-year highs, Singapore’s core consumer price index rose 5.1% for the month from a year ago, slightly below 5.3 % in September.

Singapore does not have an explicit inflation target, but MAS considers that a core inflation rate of 2% generally reflects ‘overall price stability’. The country’s core CPI in October is also significantly above that level, along with the central bank’s forecast for inflation “around 4%” for 2022.

JPMorgan analysts said while they expect core inflation levels to remain elevated through the first quarter of next year, they predict subsequent readings will show further easing. This would leave room for the central bank to move away from a hawkish stance.

“If this forecast materializes, it would suggest that MAS would have little need to tighten its NEER policy next year,” the company said in a note.

Spike of aggression?

Minutes from the Federal Reserve’s latest meeting released this week indicated that smaller interest rate hikes were expected “soon” – an indication that its global peers, including the MAS, could also take a hit. pause from their own tightening cycles.

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

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

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Nagutha pointed out, however, that high inflation will continue to widen for some time.

“MAS won’t be declaring it a hit anytime soon in our view,” he said.

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

Although global central banks like the Reserve Bank of Australia and the Bank of Korea have taken more modest steps in raising interest rates, inflation will remain a key target, he said.

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

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