Easy access to car loans in Singapore likely to spur headline inflation

Singapore’s headline inflation is expected to shoot up in the coming months, given certain easing norms are allowed in car loan financing regulations. The Monetary Authority of Singapore has already relaxed the previous limitations on car loans the last Friday.

The maximum loan-to-value ratio for vehicles on the open market less than or equal to SGD 20,000 will be raised from 60 percent to 70 percent, and that for vehicles more than SGD 20,000 will be upped to 60 percent from 50 percent previously, DBS reported.

The easing in the car loan market will attract more buyers, henceforth, increasing sales and lifting the private transport CPI index. Given, the strong impact that the COE premiums have on CPI index, the former is likely to witness certain upward adjustments.

Private transport CPI accounts for a significant 11.5 percent of the overall CPI basket which is likely to have some impact on CPI inflation in the coming months.

"Indeed, CPI inflation is expected to revert back to positive level from 3Q16 onwards on account of a lower base effect and recovery in oil prices," DBS mentioned in a research note.

The above view will be reinforced with the easing norms in car loan facilities. However, overall inflation for the year is expected to register -0.2 percent. This will, anyways, have a sprinkling effect on the MAS policy decision, since the authority will mainly focus on core inflation rather than headline all-items CPI-led inflation.

In this respect, core inflation is still likely to hover between the 0.0-1.0 percent range and more importantly, below the medium term target of 2.0 percent.