Explainer-How Singapore’s unique monetary policy works
By Xinghui Kok
SINGAPORE, July 27 (Reuters) – Singapore’s central bank unexpectedly tightened monetary policy settings on Monday, with inflation forecast to rise in the coming months.
Singapore’s central bank has a unique way of managing monetary policy by adjusting its currency’s exchange rate rather than changing domestic interest rates like many economies.
The Monetary Authority of Singapore (MAS) determines the path of what it calls the policy band of the Singapore dollar nominal effective exchange rate (S$NEER), thereby strengthening or weakening the local currency against its major trading partners.
WHY DOES SINGAPORE USE THIS METHOD?
Singapore is a small, trade-based economy. Gross exports and imports of goods and services are more than three times the gross domestic product (GDP). Almost 40 cents of every Singapore dollar spent domestically goes to imports.
This means that the exchange rate has a much larger impact on inflation than domestic interest rates.
For example, an appreciation of the Singapore dollar against the currencies of major trading partners will reduce the prices of imported goods and services. This reduces the prices households have to pay.
WHAT IS S$NEER?
S$NEER is an index of the trade-weighted exchange rate of the Singapore dollar against the currencies of the island’s major trading partners.
The central bank says this allows the Singapore dollar to demonstrate collective performance in relation to its major trading partners, which is important for overall price levels in Singapore.
HOW DOES S$NEER POLITICS TAPE WORK?
MAS does not determine the exact level of the exchange rate or control it in real time. Instead, S$NEER is allowed to move up and down within a policy band, the exact levels of which are not disclosed. If it goes outside this band, MAS steps in by buying or selling Singapore dollars.
There are three parameters in the policy band that MAS can adjust. Until 2024, these parameters were reviewed at least twice a year, usually in April and October.
Additional reviews may be undertaken if conditions require an urgent change in settings, as in 2022 when high inflation triggered two off-cycle movements.
The central bank began making monetary policy announcements every quarter starting in 2024, which it said allowed policymakers to provide their assessments of the economic outlook in a more timely manner.
The three policy levers are the slope, level, and width of the band.
Adjusting the slope will affect the rate at which the Singapore dollar strengthens or weakens.
