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Price Stability and Monetary Policy in Singapore
Outline of Presentation
Price Stability
Definition, Rationale and Measure
The Exchange Rate as the Instrument for Monetary Policy Rationale
The “BBC” System
Features of the Band, Basket and Crawl
Monetary Policy in Singapore
Processes and Recent Decisions
“The principle object of the Authority shall be... to maintain price stability conducive to sustainable growth of the economy.” – MAS Act
Medium-Term Price Stability
Small and Open Economy
Firms are able to commit to longer planning horizons
Less uncertainty over returns on long-term investment
Ensures a competitive export industry
Sustainable Growth
Low and Stable Inflation
MAS Core
Inflation
What is the MAS Core Inflation
measure?
• Excludes the cost of private road
transport and accommodation
• These components are volatile
and are driven by administrative
measures e.g. COE
• Not appropriate to exclude food
and energy given high share
(27%) in a household’s typical
consumption basket
CPI and MAS Core Inflation
MAS is primarily concerned with Core
Inflation…
-2
0
2
4
6
8
2007 2008 2009 2010 2011
YO
Y %
Gro
wth
Headline CPI
Inflation
Global Prices of Primary Commodities
and Electronics Goods Output Gap and Unit Labour Cost
…although it also looks at a range of other
price and cost measures that underpin
inflationary pressures in the economy.
0
50
100
150
200
250
300
350
1980 1988 1996 2004
Ind
ex (
Q1 1
980=
100)
Food &
Beverage
Energy
Industrial
Inputs
Electronics
2011
Q3
1978 1986 1994 2002 2010
-10
-5
0
5
10
15
Per
Cen
t
Unit Labour Cost
(YOY Growth)
Output
Gap (% of
Potential
GDP)
Outline of Presentation
Price Stability Definition, Rationale and Measure
The Exchange Rate as the Instrument for Monetary Policy Rationale
The “BBC” System
Features of the Band, Basket and Crawl
Monetary Policy in Singapore
Processes and Recent Decisions
Intermediate Target:
S$ nominal effective exchange rate
“…Underlying this shift in emphasis away from targets for interest rates and money supply
growth in the conduct for monetary policy is the view that the exchange rate is a relatively
more important anti-inflation instrument in the context of the small and open Singapore
economy…”
MAS Annual Report, 1981-1982
Ultimate Objective:
Price Stability as the Basis for Sustained Economic Growth
MAS ACT
The exchange rate-centred
monetary policy framework as the
means to price stability
Price stability
Exchange Rate
Why is the exchange rate the
ideal monetary policy
instrument?
• It is relatively controllable
by the MAS.
• It has a strong and stable
relationship with domestic
inflation.
• It is suited to Singapore’s
economic circumstances.
Why is the exchange rate the ideal
monetary policy instrument?
Trade to GDP Ratio
50
70
90
110
130
150
170
190
210
65 73 81 89 97 05
% o
f G
DP
Imports
Exports
11
Singapore is a highly trade-
dependent economy with free
capital mobility.
High Degree
of
Openness
to Capital
Flows
High Degree
of Openness
to Trade
Small
Economy
with No
Natural
Resources
Exchange
Rate
Assets in Banking Sector
0
500
1000
1500
2000
2500
70 77 84 91 98 05 2011Q3
S$ B
illio
n
Asian
Dollar
Market
Domestic
Singapore is a highly trade-
dependent economy with free
capital mobility.
High Degree
of
Openness
to Capital
Flows
High Degree
of Openness
to Trade
Small
Economy
with No
Natural
Resources
Exchange
Rate
Impact of Policy Instruments
The S$ Nominal Effective
Exchange Rate is the ideal
monetary policy instrument.
High Degree
of
Openness
to Capital
Flows
High Degree
of Openness
to Trade
Small
Economy
with No
Natural
Resources
Exchange
Rate
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
export gdp cpi
NEER_policy IR_policyGiven a 1% pt (one-off) in:
S$NEER
Interest Rate
Exports GDP CPI
Per
Cen
t
Imported foreign
inflation channel
(Direct channel)
Derived demand
channel
(Indirect channel)
CPI Inflation
S$NEER affects export
demand, thereby
influencing demand for
factor inputs.
Exchange rate policy affects
inflation through two channels.
S$NEER translates
foreign price of
imports into S$.
A stronger S$NEER
lowers import prices.
Cost pressures due to demand
for Singapore’s exports
Foreign prices of imported
consumer goods
CPI Inflation
Singapore’s inflation performance
has improved and is comparable to
the OECD.
2010
Volatility of CPI Inflation
0
1
2
3
4
5
6
7
8
9
1971-1980 1981-2010
Sta
nd
ard
De
via
tio
n o
f In
fla
tio
n (
%)
OECD
Singapore
-5
0
5
10
15
20
25
1971 1981 1991 2001
YO
Y %
Gro
wth
Singapore
OECD
Outline of Presentation
Price Stability Definition, Rationale and Measure
The Exchange Rate as the Instrument for Monetary Policy Rationale
The “BBC” System
Features of the Band, Basket and Crawl
Monetary Policy in Singapore
Processes and Recent Decisions
BASKET
BAND
CRAWL
Characteristics of Singapore’s
Exchange Rate System
The exchange rate is managed against a trade-
weighted basket of currencies of our major
trading partners and competitors
Mitigates volatility of international foreign
exchange markets
The trade-weighted S$ is allowed to float within
an undisclosed policy band
Absorbs short-term market volatility, provides
flexibility in managing the exchange rate
The policy band itself is adjustable and allowed
to “crawl”, reflecting underlying fundamentals
Prevents misalignment in the currency
S$N
EER
Ind
ex
Date
Example 1:
Apr 2010: Increase the pace of appreciation
S$ appreciation
Policy Lever (1):
Slope of policy band
Normally undertaken when
MAS assesses that the trajectory for
economic activity in the medium
term is changing gradually.
Policy Lever (2):
Width of policy band S$
NEE
R In
dex
Date
Example 2: Oct 2010: Widen policy band in view of volatility across int’l financial markets
S$ appreciation
Normally undertaken when
developments cause a short-term
increase in S$NEER volatility
S$N
EER
Ind
ex
Date
Example 3:
Apr 2010: Re-centre policy band at current level of S$NEER
S$ appreciation
Policy Lever (3):
Level of policy band
Normally undertaken when
developments cause an abrupt
shift in the path
of economic activity
Outline of Presentation
Price Stability Definition, Rationale and Measure
The Exchange Rate as the Instrument for Monetary Policy Rationale
The “BBC” System
Features of the Band, Basket and Crawl
Monetary Policy in Singapore
Processes and Recent Decisions
(1) Policy Formulation
(2) Policy Decision
(3) Policy Implementation
3-Stage Monetary Policy Process
CPI
Inflation
GDP
Growth
The change in the Monetary Policy stance is a function of the
deviation of output and inflation from trend.
Singapore Economy
Balance of Risks to Growth and Inflation
The policy decision involves an
assessment of the balance of risks
to growth and inflation.
Recent Monetary Policy Decisions
98
100
102
104
106
108
110
Ind
ex Q
1 2
008 =
100
2008 2009 2010 2011
-10
-5
0
5
10
15
20
YO
Y %
Gro
wth
Re-centre
upwards Increase
Slope &
Widen
Band
Re-centre, shift
to appreciation
path
Recovery: Modest &
Gradual
Appreciation
GDP
Growth
S$NEER
Flatten
policy
band
Great Recession:
Neutral Policy Stance
CPI
Inflation
Re-centre
down-
wards
Maintain
Subdued
Growth
Boom: Modest &
Gradual Appreciation
Reduce
slope
Q4
Summary
Price Stability
Low and stable inflation ensures that resources are efficiently allocated and households
and firms can make optimal savings and investment decisions. The primary indicator of
price stability is the MAS Core Inflation measure.
The Exchange Rate as the Instrument for Monetary Policy
The exchange rate has a strong and stable relationship with domestic inflation. It is very
well-suited to a small, open economy.
The “BBC” System
The S$NEER is managed against a Basket of currencies from Singapore’s major trading
partners. The width and level of the Policy Band, as well as its Crawl (slope) can be
adjusted at each monetary policy review.
Monetary Policy in Singapore
In view of the expected moderation in core inflation as economic activity slows, MAS
reduced the slope of the policy band in October 2011. Monetary policy has become
increasingly challenging given numerous external shocks to the economy, permanent
relative price changes, and rising asset prices. MAS has enhanced its monetary policy
toolkit to deal with these new challenges.
Thank You