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How does Singapore's monetary policy differ from the rest of the world?

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How does Singapore's monetary policy differ from the rest of the world?

03 Nov 2018 06:54 PM
Editing: Sally Ismail

The interest rate is the main reference tool for central banks around the world, which is used to tighten monetary policy or even make it concessional, but for each rule Ahahad!.

Singapore's monetary policy may look somewhat reversed.

While monetary tightening for most countries is equivalent to high borrowing costs, this is not the case within the Asian country where the interest rate can rise when the central bank makes use of concessional monetary policies.

This is because Singapore policymakers use the exchange rate rather than interest rates as a major monetary policy tool in their semi-annual reviews issued in April and October each year, according to the Bloomberg View report.

Why is the exchange rate targeted?

Singapore uses the exchange rate as a small open economy with a population of 5.6 million and heavily dependent on trade.

Singapore's currency (Singapore dollar) affects the country's inflation rate more sharply than other countries, so targeting the exchange rate instead of interest rates is more effective to stabilize prices, the central objective of the central bank.

In addition, the exchange rate is relatively easier to control through direct market interventions, namely the purchase or sale of the Central Bank of the Singapore dollar, and the exchange rate has a stable and predictable relationship with price stability.

How does the Singapore Monetary Authority do exactly that?

The Singapore dollar is managed against a basket of currencies of the country's main trading partners, but the central bank does not disclose them.

Australia & New Zealand's banking group points out that the basket of currencies with the largest weight is the US dollar, the Malaysian ringgit, the yuan, the euro and the Japanese yen.

The trade-weighted exchange rate is allowed to fluctuate within a range known as the range of monetary policy.

This gives the Monetary Authority of Singapore (MES) three criteria by which it can adjust the currency guidance through the rate of raising, reducing or centralizing the range of exchange rate movements.

Why interest rates may fall when monetary policy tightens?

If Singapore's monetary policy tightens, the exchange rate will rise at an accelerating pace, inflation will slow and interest rates will fall as investors need less compensation to keep Singapore dollar-denominated assets against the US dollar or other assets.

Interest rates are largely determined by interest rates abroad as well as investor speculation about the future movements of the local currency in Singapore in the context of the so-called interest rate parity.

Last October, Singapore's one-year benchmark rate was 0.85% less than the US dollar, indicating that the Singapore dollar is expected to rise 0.85% next year against the greenback to compensate investors for the low domestic price.

Are there any drawbacks to the framework of this policy?

The lack of interest rate control tends to follow its US counterpart.

When monetary power in Singapore eases monetary policy to stimulate inflation, borrowing costs may rise and threaten to cut consumer spending as in 2015.

The central bank said interest rates were less effective than the exchange rate in influencing economic activity.

But the monetary policy directed against inflation imported from abroad can be less effective when it comes to factors driven by domestic demand such as property prices.

To address these issues, Singapore has turned into so-called macro-prudential measures, including tougher housing loan requirements and higher real estate taxes to cool the housing market.

When will the Monetary Authority meet in Singapore?

Monetary policy decisions are usually made twice a year, in mid-April and October of each year.

However, there was a non-periodic disclosure in January 2015 in a move that surprised the markets, indicating that the central bank is not linked to a schedule every six months.

In its October 12 decision, the bank lifted the currency range slightly for the second time this year.

Singapore's Deputy Prime Minister Tharman Shanmugaratnam is the chairman of the Monetary Authority, known as the MES.

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