MAS to Adopt a 0% P.a. Appreciation Path for the S$NEER Policy Band

Singapore’s inflation jumped from 0.4% yoy in April to 1.4% in May, the highest level since June 2014 and exceeding market expectations of 1.3%. The strong pickup in inflation rate was attributed mainly from higher cost of housing and utilities, which turnaround to +0.1% yoy in May after 33-month of contraction. Food category, which has the weightage of about 21.7% in CPI basket, rose by 1.5% yoy during the month (1.3% yoy in April), due to rising prices of non-cooked items (e.g. vegetables, bread and cereals). Excluding accommodation and private road transport segments, the country’s core inflation improved slightly from 1.7% yoy in April to 1.6% in May.

We believe Singapore’s inflation will likely trend lower and normalize in June as the sharp increase in May was due to lower base from last year as well as disbursement of Service and Conservatory Charges (S&CC) rebate in April last year. The cost of transport, which rose strongly since early this year, has also started to moderate in the month of May. This will likely continue in the months ahead from lower global oil prices. We expect the inflation rate to ease slightly in the coming months, but Singapore’s inflation is expected to rise from -0.5% yoy in 2016 to a range of 0.5-0.8% this year, at the lower end of official forecast of 0.5-1.5% target. We believe Monetary Authority of Singapore (MAS) will likely adopt a 0% p.a. appreciation path for the S$NEER policy band, where this neutral stance will continue to facilitate a turnaround in inflation rate.

Separately, Singapore’s industrial production slowed further from 6.7% yoy in April to 5% in May. This was below market expectations of 7.5% gain during the month. The slowdown in production was attributed to lower output of the electronic sector, which slowed by 35.1% yoy in May (48.2% yoy in April), on lower output of semiconductor, data storage and other electronic modules or components. This was partly in line with lower demand from China, as May trade data released by China’s National Bureau of Statistics, showed China imports from Singapore slowed by 0.5% yoy in May (35.5% in April). Excluding biomedical manufacturing, Singapore’s total production rose by 13.1% yoy in May.

With Singapore’s IPI growth expanding by 5.8% yoy in April-May, as compared to 8.5% in 1Q17, we believe the country’s real GDP growth may moderate to 2.3-2.5% yoy in 2Q17 (2.7% in 1Q17). According to MAS, the country’s economy is expected to continue to expand by between 1-3% for the remainder of the year (2% in 2016). The downside risks highlighted by MAS included anti-globalisation sentiment, potential shifts towards more protectionist policies, and diverging monetary policies among the advanced economies, which could portend weaker global growth and greater market volatility.

Source: Affin Hwang Research - 30 Jun 2017