price stability and monetary policy in singapore/media/mas/monetary policy and... · price...

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)


Price Stability Definition, Rationale and Measure






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

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


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


developments cause an abrupt

shift in the path

of economic activity

(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 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.


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

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