Singapore – the 2022 budget and possible MAS responses

Singapore – the 2022 budget and possible MAS responses

• SGD: Singapore’s budget 2022 measures released last week could help drive Singapore’s core CPI inflation above 2% to between 2-3.5% into 2024 and to 3% as soon as March or April 2022, sooner than MAS’s updated January forecast for core CPI to reach 3% only by mid-2022. However, the delayed GST hike (given the decision to postpone and stagger the GST increase to 2023 and 2024) reduces the likelihood of a policy-induced spike in core CPI to >4% in 2022. Nevertheless, Singapore’s core inflation would still likely remain well above historical averages in 2H22.

• SGD: While the likelihood of an upward re-centering of the NEER band in April is reduced given the delayed GST hike (though not eliminated given upside risks to H1’22 core CPI), should MAS reach a similar conclusion to Citi analysts’ assessment that medium-term core inflation could stay above 2%, this would argue for a steeper “new normal” slope of >2% p.a, in order to restore policy neutrality in real terms (vs. closer to 1.5% in the 2017-2019 cycle). Citi analysts’ base case is for a 100bps slope steepening in April to 2.5% p.a,, but the team will watch Jan-Feb core CPI to assess risks of more aggressive tightening.

MAS potentially faces 3 alternative scenarios depending on the path of core CPI

• SGD: In a scenario where Singapore’s core CPI averages 2.5% in 2022 (mid-point of MAS’s updated January 2022 forecast), but MAS steepens the slope by 100bps to 2.5% in April, policy could stay accommodative through 1H22, but will be gradually neutralized in 2H22 as the cumulative effects of the April 2022 slope steepening on SGD NEER take effect. Assuming no further tightening through 2024, if core CPI averages between 2-2.5% through 2024, the neutral path of NEER would be on average 191bps above mid-point between 2022-2024. A more aggressive slope steepening to 3% in April would bring the neutral path to 132bps above the mid on average.

• In a scenario where core CPI jumps to 2.7% in January 2022, and averages 3.1% in 2022 (Citi’s latest forecasts), a slope steepening to 2.5% in April alone may be insufficient as the neutral path of the NEER may average 260bps above the midpoint from 2022-2024 which is below the CPI forecast. It would take a more aggressive slope steepening in April to 3% p.a. to restore policy neutrality. Alternatively, a concurrent 100bps upward band re-centering with a 100bps slope steepening (to 2.5%) would also see the neutral path of NEER returning to the band by July 2022.

• But if upside inflation surprises are sufficient to raise average 2022 point core CPI forecasts closer to 3.5% or higher, then MAS’s 2022 core CPI forecast could be raised to 3-4%, in which case the risk of an upward re-centering will likely increase sharply.

Week Ahead – Fed, BoE speak and the RBNZ board meeting

• USD: Fed speakers remain in focus this week with Atlanta’s Fed President Bostic who has been relatively hawkish on the balance sheet, but as of recently had a base case for just three 25bp rate hikes in 2022. Other Fed speakers this week include Bowman, Barkin, Mester and Waller.

• USD: US January Personal Income – Citi: -0.4%, median: -0.4%, prior: 0.3%; Personal Spending – Citi: 1.7%, median: 1.5%, prior: -0.6%; Core PCE MoM – Citi: 0.5%, median: 0.5%, prior: 0.5%; Core PCE YoY – Citi: 5.1%, median: 5.2%, prior: 4.9% - key data to focus here is core PCE inflation that should rise 0.48%MoM and to 5.1%YoY in January based on elements of CPI and PCE inflation, which both show broadening price pressure across goods and services. Citi analysts expect the near-term path of Y/Y PCE inflation is likely to continue to climb.

• USD: US January Durable Goods Orders – Citi: 2.9%, median: 0.9%, prior: -0.7%; Durable Goods Orders ex Trans – Citi: 0.6%, median: 0.3%, prior: 0.6%; Capital Goods Orders Non-defense ex Air – Citi: 0.9%, median: 0.3%, prior: 0.3% - Citi analysts expect a strong 2.9% increase in durable goods orders in January, with strength mostly led by orders for aircraft. Orders for other durable goods should also be strong in January despite some temporarily softer manufacturing activity due to increased worker absences.

• GBP: BoE: The road to 50bps? – Following on a heavy week of data, this week will see an intense set of comments from various MPC members. The key questions looking ahead to March are – (1) the level of concern surrounding UK inflation expectations, and (2) the risk of potential economic overheating. Kicking off the week will be Sir Dave Ramsden followed by the testimony to the Treasury Select Committee from Bailey, Broadbent, Haskel and Tenreyro. Rounding out the week are a series of comments surrounding the Bank’s Agenda for Research Conference with potentially interesting comments on the BoE balance sheet. 

• EUR: Germany Ifo Business Climate, February: Citi Forecast 96.5, Consensus 96.5, Previous 95.7;  Ifo Expectations, February: Citi Forecast 97.0, Consensus 96.5, Previous 96;  Ifo Current Assessment, February: Citi Forecast 96.0, Consensus 96.1, Previous 95.2 

• NZD: RBNZ OCR Decision & February Monetary Policy Statement: Citi OCR forecast; +25bps to 1.00%, Previous; +25bps to 0.75% - Citi analysts expect the RBNZ to raise the cash rate (OCR) by a further 25bp to 1.00%. With the yearly 5.9% rise in Q4 CPI well ahead of RBNZ’s expectation of 5.7% and a 3.2% unemployment rate well-below the estimated NAIRU range of 4%-5.5%, the MPC is expected to remain hawkish.

• AUD: Australia Q4 Wage Price Index: Citi forecast; 0.7%, Previous; 0.6% - Citi analysts expect an acceleration in wage costs to come from the private sector with the wage cost index expected to rise by 0.7% in Q4. This would be the fastest quarterly increase in almost 10 years, but only lift YoY wages growth from 2.2% to 2.3%. Overall, the forecast for wages growth represents only a very slow steepening of the Phillips Curve.

• SGD: Singapore CPI Core (%YoY) for January: Citi Forecast 2.7, Prior 2.10; CPI (%MoM, NSA): Citi Forecast 0.4, Prior 0.50; CPI (%YoY): Citi Forecast 4.3, Prior 4.00; Singapore  Industrial Production (%MoM, SA) for January: Citi Forecast -5.6, Prior 4.30; Industrial Production (%YoY): Citi Forecast 5.5, Prior 15.60.

This is an extract from the Daily Currency Update, dated February 22, 2022. Please approach a Citigold Relationship manager if you would like more information. For the latest CitiFX house views and strategy, please click here -

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