The list of sell-side analysts calling for an out of cycle MAS tightening is growing. This should keep the SGD NEER close to the top end of the policy band
- To recap, yesterday's May inflation data showed headline inflation pressures stronger than expected. MoM rose by 1.0%, YoY by 5.6%, both 0.1% firmer than consensus. Core inflation came in as expected, but at 3.6% YoY is still the firmest pace since 2008.
- Earlier this week the government unveiled a support package worth $S1.5bn to combat cost of living pressures for low income households. Hence addressing inflation pressures remains front and centre for policy makers.
- As we noted earlier the rate of SGD NEER appreciation (just over 3% for the past year) is still lagging the rate of inflation.
- J.P. Morgan expects a tightening, via a re-centering of the NEER, after the next CPI print on July 25th. They also don't rule out a steeper rate of NEER appreciation.
- Such a backdrop should leave the SGD NEER biased higher and close to the top end of the policy band ahead of any such risk of a policy adjustment.
- The chart below plots the NEER deviation from the top end of the band, based off Goldman Sachs estimates. We currently sit 0.35% below the top end of the band, which is modestly lower than earlier YTD highs.
Fig 1: GS SGD NEER - Deviation From Top End Of The Policy Band (%)
Source: Goldman Sachs, MNI - Market News