MAS cuts 2016 headline inflation forecast, reflecting deeper decline in global oil prices

Singapore's headline CPI continued to be in the negative territory in January, dropping 0.6% y/y, the same decline as in December. The drags on headline inflation were due to the weak rental market and private road transportation. In contrast, core inflation accelerated 0.4% y/y, as compared with December's 0.3%, on a lower base because of the introduction of raised medical subsidies and the 7.9% cut in electricity tariffs in January 2014. Along with this, higher retail clothing and food prices before the Lunar New Year holiday helped core inflation in January.

The Monetary Authority of Singapore, with the release of inflation data, cut its headline inflation forecast for 2016 to -1.0% to 0% from -0.5% to +0.5%. The shift in the headline inflation range shows the deeper drop in the global oil prices. The weak inflation outlook is further worsened by dropping CoE prices.  However, the MAS maintained its core inflation forecast at 0.5-1.5%. However, the key core inflation driver, might be eased moderately by the weak growth outlook. Core inflation is likely to be supported by a favorable low base in 2016.

"In light of the deeper slump in CoE prices amid low oil prices, we downgrade our 2016 inflation forecast 70bp, to -0.2% y/y", says Barclays.

The outlook for a longer period of weak inflation suggests that there might be room for policy adjustment if growth declines further. Continuous subdued external demand and downward pressure on oil prices continue to keep external-oriented sectors under pressure. It is unlikely that external demand will rebound in H1 due to emerging headwinds, such as currency volatility and increasing geopolitical tensions.

The services economy is not expected to take up the slack. The job market might be starting to weaken as layoffs increase and job creation continues to slow, mainly in sentiment-sensitive services industries.

"We now see increasing risk that the economy may contract in Q1, facing these headwinds. This puts at risk our view that the MAS will maintain the SGD NEER policy band at its meeting in April", says Barclays.