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Inflation in Singapore may have eased somewhat, but the central bank warns that the pain could still persist

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Singapore skyline from Merlion Park on May 15, 2020.

Roslaan Rahman | AFP | Getty Images

Singapore’s economy could face continued pain from global financial concerns, even as the country’s core inflation eased somewhat in October.

Singapore’s monetary authority warned of an accumulation of long-term risk factors to the country’s financial vulnerability in the corporate, housing and banking sectors, citing weak demand and continued inflationary pressures.

“As foreign demand weakens, Singapore’s economy is expected to slow to a downward trend pace in 2023,” the central bank said in its latest Financial Stability Review report. “Inflation is expected to remain elevated on a sustained pass-through basis of a strong labor market and higher imported inflation.”

The central bank warned of contagion risks from global markets, saying the country’s business, household and financial sectors must “remain vigilant” amid the macroeconomic challenges ahead.

“The most immediate risk is a potential dysfunction of key international funding markets and liquidity pressures on non-bank financial institutions that could quickly spread to banks and corporates,” the report said.

The report comes days after the country reported some easing of inflationary pressures for October. While Singapore’s main consumer price index is still at a 14-year high, it rose 5.1% year-on-year this month, down slightly from September’s 5.3%.

Singapore has no explicit inflation target, but the MAS maintains a core inflation rate of 2%, generally referred to as “general price stability”. The country’s core October CPI is also well above that level, as is the central bank’s forecast of “around 4%” inflation for 2022.

Analysts at JP Morgan said that while they expect core inflation to remain elevated in the first quarter of next year, they expect further moderation in coming readings. This would leave room for the central bank to move away from an accommodative stance.

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“If this prediction comes true, it would indicate that MAS may not need to tighten its NEER policy next year,” the company said in a note.

Peak hawkishness?

Minutes from the Federal Reserve’s latest meeting published this week said a small rate hike should happen “soon” — a sign that its global peers, including the MAS, may be taking a breather from their own tightening cycles. Can

“The MAS is in a similar position – it has tightened monetary policy sharply in 2022 and is curious to see how that plays out,” said Mohd Faiz Ngutha, economist at BofA Securities ASEAN.

“This means there is no room for further tightening, but it cannot be ruled out at this point,” he added.

However, Ngutha stressed that high inflation will remain pervasive for some time.

“MAS won’t declare it a success any time soon,” he said.

IG Markets strategist Jun Rong Yep said the same is true for MAS colleagues in the Asia Pacific region.

He said that while global central banks such as the Reserve Bank of Australia and the Bank of Korea have taken small steps to raise interest rates, inflation will remain a major focus.

“Continued price pressures may still be a driver of how high or how long interest rates remain in restrictive territory,” he added. “And that will come with more compromises for growth.”

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