The Monetary Authority of Singapore (MAS) tightened its monetary policy for the fifth time in a year, which strengthened the Singapore dollar. That helps neutralise inflation. The Singapore Central Bank has re-centred the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band “up to its prevailing level”. The slope and width of the band were left unchanged. MAS is effectively allowing the Singapore dollar to appreciate. This makes imports cheaper and in turn helps to put a lid on the rise in prices of goods and services in Singapore.
The global economy faces high inflation and lower growth in 2023 while Singapore’s economic growth will "come in below trend" in 2023 amid intensified downside risks. Core inflation is expected to remain elevated over the next few quarters, with risks still tilted to the upside.
Source:
https://en.wikipedia.org
Singapore's central bank has a unique approach to monetary policy. Unlike most central banks that manage monetary policy through the interest rate, it uses the exchange rate as its main policy tool because Singapore is an open economy that depends heavily on trade. It is 3x the GDP.
The exchange rate of the Singapore dollar managed against a trade-weighted undisclosed basket of currencies from Singapore’s major trading partners, referred to as the S$NEER . MAS allows the S$NEER to float within an unspecified band. Should it go out of this band, it steps in by buying or selling Singapore dollars. The central bank also changes the slope, width and mid-point of the band when it wants to adjust the pace of appreciation or depreciation of the local currency based on assessed risks to Singapore’s growth and inflation.
With Singapore buying almost everything it consumes from abroad, a stronger Singapore dollar will help convert foreign prices of imports into lower local prices. The flip side of that, however, is a possible hit on the competitiveness of the country's exports.
The three policy levers of MAS are:
1. The slope
This is probably the most common tool used by the MAS to adjust the band. Simply put, the slope determines the rate at which the Sing dollar appreciates. If the slope is reduced, this means the local currency will be allowed to strengthen at a slower pace. It strengthens at a faster pace when the slope is increased.
2. The mid-point
This is a tool generally reserved for “drastic” situations, such as recessions, when the outlook for growth and inflation sees an abrupt and rapid change. Compared to tweaks in the slope, an adjustment in the mid-point either upwards or downwards is likely to yield a quicker and bigger impact on the currency, economists have said.
3. The width
This controls how far the Sing dollar can fluctuate. This means the wider the band, the more volatile the currency can be. It is typically reserved for periods of increased uncertainties or volatility.
Under both exchange rate (MAS) and interest rate regimes (followed by BNM), monetary policy operations lead to changes in the central bank’s balance sheet. For example, the selling of US$ to strengthen the S$NEER will have the effect of reducing Official Foreign Reserves on the asset side of MAS’ balance sheet, which is matched by a reduction in banks’ cash balances with the MAS on the liabilities side. This is akin to a central bank that targets a higher interest rate by selling domestic currency-denominated securities and thereby reducing the asset side of its balance sheet, matched by a reduction in banks’ cash balances with the central bank on the liabilities side.
MAS’ intervention operations are thus akin to interest rate-targeting central banks’ monetary policy operations. Instead of using money market operations to achieve a targeted policy rate, Monetary and Domestic Markets Management Department (of MAS) uses FX intervention operations to ensure that the S$NEER stays within the policy band.
MAS has reserves in excess of USD400 billion while BNM’s reserves is only above USD100 billion.
So, what’s best? An interest rate regime or forex intervention as a monetary tool? Either tool is neutral and can be used to meet overall objectives.
From an inflation perspective MAS is direct and efficient in managing its core inflation with the exchange rate mechanism. BNM has been focused on growth, which suggests keeping rates as low as possible and leaving exchange rate to find its own level. The problem with that is we are not in lock-step with the Fed which leaves us vulnerable to exchange rate depreciation and imported inflation. If we drop this growth obsession and move in tandem with the Fed, we will ameliorate imported inflation and have a decent exchange rate. To do so, we need to increase OPR by another 0.75% - 1.0% in November. Will we do that? No, it is probably going to be an increase of 0.25% which is neither here nor there!
References:
MAS tightens monetary policy for the fifth time in a year to dampen inflation, Tang See Kit,
14 Oct 2022, Channel News Asia
How does MAS carry out its monetary policy? https://www.mas.gov.sg
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