Monetary policy tightening in October likely following record-high inflation in July

Experts expect the S$NEER slope to be raised to 2%.

The Monetary Authority of Singapore (MAS) will most likely proceed with a further policy tightening in October following a record-high headline and core inflation in July, according to experts.

UOB said it expects MAS to raise the S$NEER slope to 2%, whilst RHB expects a “slight” increase of 0.5% in the slope gradient. Both experts expect MAS to leave the width of the band and the level at which it is centred to stay unchanged.

Based on Maybank’s estimate, the S$NEER is currently trading at around +1% above the implied mid-point.

A double-tightening or even a steeper slope of 2.5% will also be likely if core inflation accelerates well above 4% in August, according to UOB.

The expert underscored that MAS had also removed its expectation for core inflation to peak in Q3.

“In the MAS inflation outlook in the July report is that it has removed its previous expectation for core inflation to peak in 3Q even as it maintained the projection for core inflation to ‘ease towards the end of 2022.’ This likely means that core inflation may stay elevated for longer,” UOB said.

RHB echoed this, saying inflation momentum will stay elevated in the next few months before easing towards Q422, citing cost-push and demand-pull drivers.

“Energy prices may stay elevated towards end-year, given the European Union’s decision to ban seaborne imports of Russian crude oil effective December 2022,” RHB said.

“Domestically, demand-pull drivers will likely be shouldered by a tighter labour market which would keep wage growth and consumer demand strong,” the expert added.

Given these factors, RHB said the inflation pace will stay at around the 7.0% handle in the coming months before dissipating towards the 5.0% level in 4Q22.

Earlier, Finance Minister Lawrence Wong already warned that inflation will only peak in Q4.

Wage and cost pressures, according to Maybank, will also persist next year given the GST hike, tight labour market and institutionalised wage adjustments via the local qualifying salary and progressive wage models.

Taking into account these factors, Maybank now expects a higher headline (3.8% vs 3.1%) and core (3% vs 2.8%) inflation for 2023.

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