How Does the Singapore Monetary Policy Work? (Simplified Version)

The Monetary Authority of Singapore (MAS) said on Wednesday (Jan 28) it will adjust its monetary policy and let the Singapore dollar appreciate at a slower pace.

The revision in monetary policy came as a surprise as MAS was only scheduled to release its next monetary policy statement in April. MAS last made an “off-cycle” adjustment to policy in October 2001, in the aftermath of the Sep 11 attacks in the United States. At that time, MAS issued policy statements in January and July.

The Singapore dollar fell on the news, losing close to 1 per cent against the US dollar and by around 0.5 per cent against the euro. Around 11.30am, the US dollar was trading around S$1.3521, while the euro was worth S$1.5328, according to Bloomberg data.

The three-month Singapore Interbank Offered Rate (SIBOR) – a benchmark for mortgage rates – edged up to 0.65289 per cent from 0.64429 per cent.

“MAS will continue with the policy of a modest and gradual appreciation of the Singapore Dollar Nominal Effective Exchange Rate (NEER) policy band. However, the slope of the policy band will be reduced, with no change to its width and the level at which it is centred,” the central bank said in its monetary policy statement.

“This measured adjustment to the policy stance is consistent with the more benign inflation outlook in 2015 and appropriate for ensuring medium-term price stability in the economy,” it added.


What is the Simplified Version?

When inflation is low and stable, there is less uncertainty about returns on long-term investments, and firms can plan further ahead. It also helps to ensure a competitive export industry. Unlike most major economies, Singapore’s central bank manages the exchange rate, rather than the interest rate, and has done so since 1981. A small and open economy, Singapore is highly dependent on trade. The Singapore dollar’s strength relative to other currencies can thus influence prices significantly.

The exchange rate is also relatively easy for the central bank to control – by buying and selling Singapore dollars. By choosing to manage the exchange rate, MAS gives up control over domestic interest rates. As capital flows in and out freely, interest rates are largely determined by foreign interest rates and how investors expect the Singapore dollar to move.




The BBC System

The “BBC” System

The Singapore dollar is managed against an undisclosed basket of currencies of Singapore’s main trading partners and competitors. Each of these currencies is assigned a different degree of importance, or weight, depending on Singapore’s trade exposure to that currency. This reduces volatility, compared to if the Singapore dollar were pegged to any single currency.

This trade-weighted Singapore dollar (S$NEER: nominal effective exchange rate) is allowed to float within an undisclosed policy band, rather than kept to a fixed value. The band absorbs short-term market volatility and provides flexibility.

The band is reviewed twice a year to ensure that the Singapore dollar is aligned with underlying economic fundamentals. By adjusting the slope, width and level of the band, the MAS allows the currency to ‘crawl’ higher or lower, rather than forcing it to move sharply. Businesses, institutions and traders can buy or sell the Singapore dollar to pay for goods and services, hedge against future movements, or trade in forex markets. But once the Singapore dollar trades outside of the S$NEER band, the MAS will step into the markets to buy or sell as much of the currency as is needed to keep it within the band.





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About the author

Spencer Li is a trader, investor and entrepreneur who currently manages his own portfolio of stocks, REITs, currencies, cryptocurrencies, properties, and businesses. As a former professional in private equity and proprietary funds, he has over 10 years of market experience, and has been featured on more than 20 occasions in the media. As an international speaker and avid globetrotter, he has travelled to over 50 countries to spread his knowledge.


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