Citi ups core inflation forecast for December; sees slightly higher risk of a slope steepening at January MPS

UOB sees a rising risk that the reversal of monetary policy tightening may be delayed to the MPS in July instead.

As November’s core inflation met the expectations of the consensus, Citi Research economist Kit Wei Zheng notes that core momentum moderated to 0.19% m-o-m according to his seasonal adjustments. Core inflation, however, accelerated to 2.91% on a three-month moving average (3MMA) annualised basis compared to the peak of 7.1% in August 2022.

In December, Kit is now expecting Singapore’s core inflation to ease to 3.0%, higher than his previous estimate of 2.9%, after taxi operators announced that they would increase their fares in the same month.

The economist is also expecting headline inflation to come in at 3.6% in December, unchanged from his previous estimates.

In 2023, the economist expects Singapore’s core inflation and headline inflation to average 4.1% and 4.8% y-o-y respectively.

“Our updated December forecast of 3% is similar to the Monetary Authority of Singapore’s (MAS) latest forecast, but 20 basis points (bps) above MAS’s implicit point forecast of 2.8% in the October 2023 Macroeconomic Review,” says Kit.

In 1Q2024, he is expecting core inflation to climb to 3.4% following the GST hike before moderating to 3.2% in 2Q2024, 3% in 3Q2024 and 2.8% in 4Q2024. Based on his estimates, core inflation is expected to average around 3.1% in 2024 and 1.8% in 2025.

“While our forecast profile for 2024 is directionally similar to MAS’s forecasts, our quarterly core forecasts from 4Q2023 - 4Q2024 are now 20bps - 40bps above MAS’s October 2023 forecasts,” he says.

Ahead of the advanced estimates for Singapore’s 4Q2023 GDP, to be released on Jan 2, Kit expects Singapore’s GDP to rebound to 2% y-o-y and 0.9% q-o-q from the recovery in trade-related sectors.

“Manufacturing likely lifted sequential GDP growth even as November’s industrial production (IP) came in weaker than expected at 1% y-o-y, -5.1% m-o-m seasonally adjusted, on a sequential pullback in electronics and transport engineering,” he writes.

“Still, after folding in outsized increases in October, October - November IP was 9.9% above 3Q2023 levels (5.6% ex biomed), lifted by electronics (12.4%) and biomedicals (14.8%). The 4Q rebound in IP came in tandem with improving external demand, as October – November non-oil domestic exports (NODX) jumped to 9.1% above 3Q2023 levels (5.7% in real terms) on pharma and electronics exports,” he adds.

Kit’s forecast for Singapore’s 4Q2023 GDP implies that the country’s full-year GDP will expand by 1% y-o-y.

The economist is keeping his 2024 GDP forecast at 2.5%. “[This] suggests a marginally narrowing, but still negative output gap, broadly in line with MAS’s October assumptions,” he says.

At present, Kit’s base case is for the MAS to remain “on hold” through 2024.

“While a December 2023 core consumer price index (CPI) reading above 3% might marginally raise the risk of a 50 bps slope steepening at the January monetary policy statement (MPS), we suspect MAS will likely prefer to wait till April for more data to assess the pass through of the second one percentage point GST hike,” he says.

He adds that there is still room to for the  Singapore dollar nominal effective exchange rate (S$NEER) to go higher to “keep policy settings sufficiently tight in real terms relative to the cycle”.

“Based on Citi’s core forecasts (4.1% in 2023 and 3.1% in 2024), the neutral NEER path would hug the band ceiling through 11M2024 if the 0.8 percentage point impact of the GST were excluded, but would be above the band ceiling if the GST impact were included,” says Kit. “Indeed, in November, the S$NEER appreciated less than core inflation in y-o-y terms (2%), implying a real rate of depreciation of 1.2%, or 0.4% if the GST impact were excluded.”

“While this, along with the upward drift in the neutral NEER path vs the band might imply some apparent loosening of policy in real terms, [the] policy would still be deemed ‘sufficiently tight’ once the continued expected negative output gap in 2024 is taken into account. Moreover, MAS’s relatively subdued estimates of the GST impact (0.5 - 0.6 percentage points versus Citi’s 0.8 percentage point estimate) suggest it will likely place a greater weight on the GST ex-core measure. To the extent that the relevant measure of the neutral NEER path is not seen breaching the band in 2024, this may alleviate concerns over excessive easing of policy in real terms,” he adds.

Any cuts by the US Federal Reserve is also unlikely to trigger easing from the MAS. “The experience of the extended hold in 2012-2014 (when the slope was at 2% per annum.) suggests any easing will likely require [the] expectation that core will fall significantly below 1.7% within the policy horizon, which is currently not in our forecasts. We note that the current 1.5% slope would already be close to policy neutrality in real terms if core reaches the 1.7% historical average,” says Kit.

UOB economists Alvin Liew and Jester Koh are keeping their headline and core inflation forecast for 2023 unchanged at 4.8% and 4.1% respectively. They have also maintained their headline and core inflation forecast for 2024 at 3.5% and 3.0% respectively.

Looking ahead, Liew and Koh see that core inflation is likely to moderate even further amid a further decline in global food prices, moderation in services inflation and easing wage growth in 2024.

The mechanical effect of the GST hike in 2024 is, however, likely to keep 2024’s core inflation above the long-term average of 1.8%. This figure may inch closer only in 2025, “aided by base effects from the GST hike”.

That said, upside risks on price pressures remain should there be any escalation in geopolitical conflicts or stickiness in food prices from climate-related events.

To this end, Liew and Koh expect the MAS to keep its policy settings unchanged in the January 2024 MPS. The central bank is expected to pencil in a slight slope reduction of 50 bps to an estimated 1.0% per annum in April 2024.

“We think that it may be slightly premature for MAS to reverse policy tightening in January 2024, given risks of a stronger-than-expected passthrough to inflation from the upcoming one percentage point GST hike in January 2024 and core inflation will still likely be a tad above the long-term average in 1Q2024,” they write.

“Into 2Q24, we project core inflation to inch closer in y-o-y terms to the long-term average, but only on an ex-GST basis. Furthermore, with the output gap expected to be still negative in 2024, a milder appreciation of the S$NEER via a gentler slope could ease concerns over export competitiveness,” they add. “However, we see a rising risk that the reversal of monetary policy tightening may be delayed to the July 2024 MPS given the possible lagged transmission of earlier wage increases and elevated business costs into services inflation, which we continue to monitor closely.”