SGD NEER Still Catching Up To Inflation

Singapore's government has unveiled a S$1.5bn support package to combat higher inflation pressures, particularly for lower income households. The authorities also warned that price pressures are likely to remain high in coming months.

• The support measures include voucher payments and household utility credits and support for local businesses.
• This move comes ahead of this Thursday's inflation data, which is expected to print at 5.5% for headline (versus 5.4% previously) and core at 3.6% (3.3% previously).
• The MAS forecasts sit at an average of 2.5-3.5% for core this year and 4.5-5.5% for headline. Current YoY momentum is already at the top end of these ranges.
• Strong inflation or further upside surprises will keep the market skew towards further MAS tightening.
• To be sure, the SGD NEER has continued to play catch up with underlying inflation pressures. The NEER rose just over 3% in the year to the end of May, see the first chart below. We have gained roughly a further 0.2% in June to date.

Fig 1: SGD NEER & Measures Of Singapore Inflation

Source: MAS, MNI - Market News/Bloomberg

• Dips in the SGD NEER remain well supported, although we are getting closer towards the top end of the MAS policy band, according to Goldman Sachs estimates.
• Through the course of last week, we got to within 0.25% from the top end of the band.
• This is one constraint on upside SGD momentum, although we would be surprised if markets moved away from expecting tighter policy from the MAS.