Explainer-How Singapore’s unique monetary policy works

Singapore’s central bank, the Monetary Authority of Singapore (MAS), has a unique approach to managing monetary policy. Instead of adjusting domestic interest rates like many other economies, MAS focuses on tweaking the exchange rate of the Singapore dollar.

The MAS sets the path of what it calls the policy band of the Singapore dollar nominal effective exchange rate (S$NEER). This involves strengthening or weakening the local currency against the currencies of its main trading partners. This method is particularly suited to Singapore, a small and trade-reliant economy where gross exports and imports of goods and services are more than three times its GDP. With almost 40 cents of every Singapore dollar spent domestically going towards imports, the exchange rate plays a significant role in influencing inflation.

For instance, an appreciation of the Singapore dollar against the currencies of its major trading partners can lead to a reduction in the prices of imported goods and services. This, in turn, helps to lower the prices that households have to pay, benefiting consumers.

The S$NEER is an index that measures the Singapore dollar’s trade-weighted exchange rate against the currencies of the island’s major trading partners. According to the central bank, this index allows the Singapore dollar to move collectively in relation to its major trading partners, which is crucial for maintaining stable general price levels in Singapore.

The S$NEER policy band works by allowing the exchange rate to fluctuate within a specified range. If the exchange rate moves outside of this band, MAS intervenes by buying or selling Singapore dollars to bring it back within the desired range. The policy band has three parameters – the slope, the level, and the width – that MAS can adjust to influence the pace and direction of the Singapore dollar’s movements.

Until 2024, MAS reviewed these parameters at least twice a year, typically in April and October. However, additional reviews could be conducted if necessary, such as in 2022 when high inflation prompted two off-cycle adjustments. From 2024 onwards, MAS started making monetary policy announcements quarterly to provide a more timely assessment of the economic outlook.

Adjusting the slope of the policy band affects the rate at which the Singapore dollar strengthens or weakens. On the other hand, adjusting the level or mid-point of the band allows for immediate changes in the S$NEER, making it a useful tool in times of economic uncertainty, such as during a recession.

Overall, Singapore’s unique approach to monetary policy through the management of the S$NEER policy band has proven effective in maintaining price stability and supporting the country’s trade-reliant economy.