UOB Lowers Full-year Inflation Forecast Amidst Disinflation in January

In a recent development, United Overseas Bank (UOB) has revised its full-year inflation forecast for 2025, reflecting the ongoing disinflation trend observed in Singapore. The bank has lowered its estimates for both core and headline inflation to 1.3% each, down from its previous projection of 1.7% for both. This adjustment comes on the heels of a significant drop in inflation rates in January 2025, with core inflation falling to 0.8% and headline inflation to 1.2%.



Several key factors have contributed to this change in UOB's forecast. Firstly, the ongoing disinflation trend in Singapore, as evidenced by the drop in inflation rates in January, suggests that prices are stabilizing or even decreasing. Secondly, the overall economic conditions in Singapore, such as slower growth and reduced demand, may be contributing to the disinflation trend. As the economy slows, businesses may be less inclined to raise prices, leading to lower inflation rates. Additionally, the Monetary Authority of Singapore (MAS) has maintained a cautious stance on monetary policy, keeping the Singapore dollar nominal effective exchange rate (S$NEER) settings unchanged. This policy has likely contributed to the disinflation trend by keeping the Singapore dollar relatively stable and preventing excessive inflation. Lastly, global economic conditions and geopolitical tensions may also play a role in the disinflation trend, as slower global growth and reduced trade activity can lead to lower demand for Singapore's exports, putting downward pressure on prices.

UOB acknowledges that risks are tilted toward further easing of monetary policy through a reduction in the S$NEER slope if core inflation momentum slows further. The bank will review its monetary policy call at the next February 2025 CPI release on 24 March, indicating that it is closely monitoring the situation and may adjust its forecast accordingly.

The implications of UOB's revised inflation forecast for the Monetary Authority of Singapore's (MAS) monetary policy, particularly regarding the S$NEER settings, are significant. Given the lower-than-expected inflation outlook, MAS may need to reassess its monetary policy stance. UOB maintains its call for MAS to keep the current S$NEER settings for the rest of 2025 but acknowledges that risks are tilted toward further easing through a reduction in the S$NEER slope if core inflation momentum slows further. This suggests that MAS might consider a more accommodative monetary policy to support economic growth, given the lower-than-expected inflation outlook.

To assess the likelihood of a further easing in the S$NEER slope, investors should monitor core inflation, headline inflation, economic growth, inflation expectations, and the exchange rate. If core inflation continues to decline or remains low, it could increase the likelihood of further easing in the S$NEER slope. Similarly, a decline in headline inflation could signal a broader slowdown in price increases, which might prompt MAS to consider further easing. Slowing economic growth could also increase the pressure on MAS to ease monetary policy. Changes in inflation expectations can influence monetary policy decisions, and if inflation expectations remain anchored or decline, it could reduce the need for further easing in the S$NEER slope. Lastly, the Singapore dollar (SGD) exchange rate is directly influenced by the S$NEER slope, and a weakening SGD could indicate that further easing is already priced in, making additional easing less likely. Conversely, a strengthening SGD might increase the likelihood of further easing.

In conclusion, UOB's revised inflation forecast reflects the ongoing disinflation trend in Singapore and has significant implications for the Monetary Authority of Singapore's monetary policy. Investors should closely monitor key indicators to assess the likelihood of further easing in the S$NEER slope and make more informed decisions about their investments.