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THE STRAITS TIMES

10 things you should know about

Singapore's monetary policy

The Monetary Authority of Singapore (MAS) headquarters. PHOTO: ST FILE

 PUBLISHED OCT 13, 2015, 10:49 AM SGT


Ann Williams (mailto:ann@sph.com.sg)

SINGAPORE - Singapore's central bank is expected by economists to ease monetary policy on Wednesday
(Oct14) - in effect, allowing the Singapore dollar to weaken - to support a struggling economy.

1. WHAT IS MONETARY POLICY?

The way a country controls the supply of money to consumers and businesses, often targeting an inflation
rate or interest rate, to encourage prices of goods and service to remain stable and promote economic
growth.

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2. WHO CONTROLS MONETARY POLICY IN SINGAPORE?

Its central bank - the Monetary Authority of Singapore or MAS.

3. HOW DOES MAS MANAGE ITS MONETARY POLICY?

Most countries, including the United States and China, adopt an interest rate policy where central banks
raise or cut interest rates.

Singapore is the only major economy in the world to use the exchange rate, guiding the Singdollar higher or
lower.

MAS says the exchange rate is the best tool for a small, open economy like Singapore. It is a more effective
way to manage inflation, as much of the country's consumer goods are imported.

4. SO IF MAS DOES NOT SET INTEREST RATES IN SINGAPORE, WHO DOES?

MAS has effectively given up control of domestic interest rates. Instead, borrowing costs are largely
determined by US interest rates and investors' expectations of the future movement of the Singapore dollar.

5. HOW DOES MAS' EXCHANGE-RATE POLICY WORK?

MAS lets the Singdollar rise or fall against an undisclosed basket of currencies of its main trading partners,
intervening when needed to keep the exchange rate within its unspecified target band.

To deter speculation and be more effective, MAS does not disclose what is in its basket of currencies or
specify its trading band.

It adjusts the pace of appreciation or depreciation of the Singdollar by changing the slope, width and centre
of this trading band.

The exchange rate that MAS targets is trade weighted such that the currencies of Singapore's larger trading
partners bear more weight. This trade-weighted exchange rate is known as the Singapore dollar nominal
effective exchange rate or S$NEER.

6. WHAT'S HAPPENING ON WEDNESDAY (OCT 14)?

MAS reviews its monetary policy twice a year - in April and October - to ensure that it is consistent with
economic fundamentals and market conditions.

On Wednesday, MAS will announce its monetary policy stance for the next six months.

It will also explain the reasons for its decision in terms of its assessment of Singapore's economic and
inflation outlook.

7. WHAT IS MAS' CURRENT POLICY STANCE?

Since October 2012, MAS' broad policy stance has been of a "modest and gradual appreciation" of the
Singdollar.

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But on Jan 28, it made an unscheduled move to ease monetary policy, the first since July 2005, after
Singapore's economic growth sagged in 2014 to its weakest in five years. MAS reduced the slope of its
policy band, in effect slowing the pace of the Singdollar's gains versus the currencies of its main trading
partners.

In April, at the first of this year's two scheduled meetings, MAS refrained from further action.

8. WHAT DO ECONOMISTS EXPECT MAS TO ANNOUNCE ON WEDNESDAY AND WHY?

A majority of economists surveyed by Bloomberg and Reuters expect MAS to ease monetary policy for a
second time this year as Singapore's economic performance has worsened since its last review in April.

As with much of the rest of Asia, Singapore's trade-dependent economy has been knocked by a sharper-
than-expected slowdown in China and uncertain recoveries in US and Europe. A Reuters poll of economists
forecast third-quarter GDP to have shrunk 0.1 per cent from the previous quarter, after a 4 per cent
contraction in April-June.

That would meet the definition of a technical recession, the first for Singapore since the depths of the
financial crisis in 2008-early 2009.

MAS' current policy setting does not allow for further depreciation of the Singdollar, which would help
Singapore's exports, a key driver of economic growth.

With Singapore consumer prices having fallen for 10 straight months to August, the threat of imported
inflation from a weaker Singdollar has been reduced, allowing more room for MAS to ease.

But some economists say there is a more-than 50 per cent chance of no MAS move on Wednesday. They
point to MAS' last review in which it emphasised the risks of a tight labour market driving up inflation.

9. IF IT EASES, HOW EXACTLY WILL MAS DO IT?

Here are some moves the MAS could make, and what they would mean.

a. Lower the upward slope of the band

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Reducing the slope of the band allows for slower gains in Singdollar over time.

This was an option the MAS exercised in January when it joined a wave of global monetary easing. The
unscheduled move helped send the Singdollar to its weakest level since 2009 against its US dollar.

b. Move the centre of the band lower

This would signal the exchange rate should remain on the weak side in the near future. Re-centering the
policy band lower by half a band would be equivalent to a one-off devaluation of the Singdollar by 2 per
cent, DBS Group Holdings senior currency economist Philip Wee said in a note on Oct 6.

c. Widen the band

Increasing the width of the band is technically a neutral stance intended to allow more volatility in the local
dollar. However, a Nomura Holdings survey of its clients in September showed 92 out of 100 polled
anticipated the Singdollar nominal effective exchange rate will weaken at least 0.1 per cent immediately if
such action was taken.

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10. WHAT DOES EASING MEAN FOR THE SINGDOLLAR AND YOU?
The Singdollar has fallen about 5 per cent against the US dollar so far this year. It will probably depreciate
about 8 per cent in total this year to $1.44 versus the US dollar, according to analysts surveyed by
Bloomberg.

If MAS eases, it could weaken the Singdollar further. This will have wide-ranging knock-on effects from the
prices of imported products in shops to more expensive overseas vacations and studies.

A weaker Singdollar and expectations of more depreciation will push local interest rates higher, affecting
home loans and all other consumer and business loans.

Sources: Bloomberg, Reuters

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