SINGAPORE (June 24): Maybank Kim Eng is retaining its 2016 headline inflation forecast at –0.4% on the dissipating effect of lower global oil prices and Singapore’s Budget 2015 measures that included rebates, subsidies and reduction of levies.
This comes after the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) announced in a joint release on Thursday that Singapore’s Consumer Price Index-All items (CPI) inflation has contracted for the 19th straight month in May – this time by a year-on-year decline of 1.6%.
External sources of inflation are also expected to be “muted” on “weak global demand and soft commodity prices” say Maybank’s analysts in a Thursday report.
However, core inflation is expected by the team to pick up gradually in 2016, as they foresee the easing of disinflationary effects of oil as well as budgetary and other one-off measures.
“Underlying inflationary pressure still exists, contributed by higher food prices, upward pressure in labour cost, and hence higher cost in the services sector. (These) are all structural issues in nature,” say the team, which maintains its average Brent price assumption for 2016 at US$40.50 ($54.76) /bbl.
With the onset of slower growth prospects and negative inflation in 2016, the team recalls that the Monetary Authority of Singapore (MAS) was prompted to act by adjusting the monetary policy to be more accommodative to growth, by setting the rate of appreciation of the Singapore dollar’s nominal effective exchange rate (NEER) to 0%.
This move has eliminated what Maybank views as “a modest and gradual appreciation path” of the SGD NEER which was reduced in January and October 2015, say its analysts.
Furthermore, on May 27 this year MAS relaxed vehicle financing restrictions that were put in place in 2013, which consequently pushed up COE premiums this month.
“We continue to see growth in 2016 to ease to +1.7% due to the ongoing structural challenges impacting domestic growth potential; issues such as productivity shortage; as well as fragile growth prospect in the global economy which dampen Singapore’s external demand,” concludes the team.