Singapore inflation trend spurs some to predict 2015 monetary easing

The Monetary Authority of Singapore (MAS) building. Singapore's headline inflation rate in November may turn negative for the first time in five years due partly to sliding oil prices, and a few economists see scope for the central bank to ease tight
The Monetary Authority of Singapore (MAS) building. Singapore's headline inflation rate in November may turn negative for the first time in five years due partly to sliding oil prices, and a few economists see scope for the central bank to ease tight monetary policy to support economic growth. -- PHOTO: ST FILE 

SINGAPORE (Reuters) - Singapore's headline inflation rate in November may turn negative for the first time in five years due partly to sliding oil prices, and a few economists see scope for the central bank to ease tight monetary policy to support economic growth.

Unlike other central banks, the Monetary Authority of Singapore (MAS) uses the exchange rate, not interest rates, as its primary policy tool, which reflects how important trade is for the city-state.

The MAS manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band.

The last time the MAS eased monetary policy was October 2011. It has stuck to a framework of allowing a "modest and gradual" appreciation of the Singapore dollar since April 2010 to curb inflationary pressures.

Most economists expect MAS to retain that stance for a time. But there is a minority view it will ease policy at its next review in April, as weak oil brings disinflationary pressures and growth momentum remains tepid.

In October, the MAS maintained its policy of Singapore dollar appreciation and kept the slope, width and mid-point of the policy band unchanged.

"I don't think it's a foregone conclusion but at the moment I'm thinking they are going to loosen," said Daniel Martin, an economist for Capital Economics, adding 2015 headline inflation will probably average "below 1 per cent".

Martin said he thinks MAS will ease in April by reducing the upward slope of the Singapore dollar's policy band and by lowering the band's mid-point.

Singapore's headline, all-items inflation rate declined this year due to falls in rents - after property-cooling measures in the last few years - and in the cost of permits to buy cars.

A slide in crude oil prices, which have tumbled over 40 per cent in the last four months, has added to the downward pressure. Economists polled by Reuters expect data due on Tuesday (Dec. 23) to show the headline inflation rate in November turned negative on an annual basis.

The central bank's core inflation gauge - which excludes changes in car prices and accommodation costs and is the focus of monetary policy - is expected to slip to 1.6 per cent, matching a low last touched in February.

Core inflation has averaged 2.0 per cent so far this year, in line with the MAS projection of 2-2.5 percent for all of 2014.

The government's push to reduce a politically unpopular reliance on foreign workers has led to a tight labour market and wage cost pressures on core inflation, which the MAS expects to come in at 2-3 percent in 2015.

However, RBS economist Vaninder Singh expects inflationary pressure to ease, partly because real wage growth has begun to moderate.

With Singapore's business cycle starting to slow, the MAS will probably ease policy in April by reducing the upward slope of the policy band, he said.

"We still haven't see the bottom of the (business) cycle,"Singh said.

To be sure, many economists still expect the MAS to stick to its tight policy settings, given the relative firmness of core inflation and the central bank's focus on that measure.

"The labour market is still pretty tight and that's essentially the binding constraint," said Credit Suisse economist Michael Wan, who assumes MAS will stand pat.

"It is possible that they could ease in April, but I suspect the benefits of doing that will be quite small," Wan added.