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Economy

Singapore inflation muted ahead of monetary policy statement

Central bank likely to remain on hold in October

SINGAPORE (Nikkei Markets) -- Singapore's inflation slowed in August as the cost of private road transport and food prices grew at a slower pace, lending weight to the view that the central bank will stand pat on monetary policy in October.

Data released by the Department of Statistics on Monday showed the city-state's consumer price index rose 0.4% in August from a year ago, slowing from July's increase of 0.6% and coming in below the forecasts of most economists.

A separate core inflation measure compiled by the Monetary Authority of Singapore gained 1.4% year-on-year, which was the smallest increase in five months. The core inflation measure rose 1.6% in July. MAS excludes accommodation and private road transport from core inflation as their price levels are influenced by government policies on housing and car usage.

"Although current economic conditions are better than just a year ago, the weakness in the labor market will set a limit on cost-pushed inflation. The August CPI numbers...show that prices are indeed not running away," said United Overseas Bank economist Francis Tan.

The August consumer price data is the last set of inflation figures to be made public before the upcoming central bank statement, which is usually out in the second week of October alongside preliminary gross domestic product data for the third quarter of the year.

Singapore manages monetary policy by guiding the value of the Singapore dollar against an undisclosed basket of currencies. MAS's current stance is for "zero appreciation," a position it had adopted since April 2016 when the economy was in a funk.

The economy has since recovered, with the government projecting growth of 2-3% this year, which would be the highest in three years.

UOB expects MAS to stand pat when its issues its half-yearly monetary policy statement in October, although it said the central bank could revert to its policy of allowing a "modest and gradual appreciation" of the local currency in April next year.

According to SingStat, private road transport inflation in Singapore fell to 2.6% in August from 3.5% in July, while food inflation was lower at 1.2% in August compared to 1.4% in July.

The cost of accommodation fell by 3.9% on-year in August, less than the 4.1% decline in July, as a larger increase in the cost of housing maintenance and repairs on a year-ago basis offset the continued drop in rents.

MAS said core inflation is expected to average 1-2% for the whole of 2017 compared with 0.9% in 2016, while headline inflation is projected to rise to 0.5-1.5% from minus 0.5% last year, reiterating a forecast made in previous months.

"The projected pickup in inflation can be attributed to the positive contribution of energy-related components and the impact of administrative price increases, rather than generalized demand-induced price pressures," the central bank said.

Looking further ahead, Rob Carnell, chief economist and head of research for Asia-Pacific at Dutch bank ING, said that while MAS would probably stand pat on monetary policy in October, the drag on inflation from lower rents is coming to an end.

"What has been keeping inflation low in Singapore is mainly housing. There hasn't been a positive contribution to CPI from housing since August 2014. But now the index for housing is beginning to turn up," he said, referring to the surge in property transactions and aggressive bidding by developers at government land auctions.

In a recent report, the Singapore Real Estate Exchange said resale prices of existing private residential apartments rose 0.7% in August from July as the number of transactions increased 19% on month to 1,273 units.

URA has previously said that private home prices fell 0.1% in the second quarter from the first three months of the year, the smallest quarterly decrease since prices started falling three-and-a-half years ago as sentiment took a hit from government cooling measures.

--Kevin Lim

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