Another month of negative inflation is on the cards in Singapore

Another month of negative inflation is on the cards. Headline inflation for August is expected to register -0.5% YoY, marginally lower than -0.4% in the previous month. While this will be the tenth month of negative inflation, this is far from a deflation scenario. Base effect will dissipate towards the end of the year and headline inflation is expected to revert to positive territory thereafter. That should put average inflation for 2016 at 1.3%, after an expected -0.2% this year. 

In the nearer term, slower economic growth and a whole slew of policy measures have continued to weigh down on the headline figure. Resurgence of global market risks have dampened oil prices and sent the equity market on a tailspin. These will exacerbate the existing global deflationary pressure, which will weigh down on Singapore's domestic prices. 

Separately, core inflation has held up. While negative core inflation will surely tip the scale towards a policy response from the Monetary Authority of Singapore (MAS), recent depreciation in Asia currencies could well exert similar pressure as well. Indeed, depreciation by regional currencies has raised questions for policymakers. The MAS has maintained a modest appreciation of the SGD NEER policy stance. If this continues, the MAS would have two choices: spend reserves defending the band or relax the appreciation policy. 

With an economy facing the risk of a technical recession and full-year inflation expected to be negative, currency appreciation becomes a difficult policy to maintain. Challenges are compounded by potential capital flight that could result from higher interest rates elsewhere and / or fears of further Asia currency devaluation. All things considered, risks are rising that the MAS eases policy in October.