Singapore’s Semi-Annual Monetary Policy Review: An Ease after Three Straight Tightenings

October 14, 2011

The Monetary Authority of Singapore (MAS) targets the currency rather than domestic interest rates and reviews its stance twice a year in April and October.  In April 2010, MAS adopted a stronger range for its currency and shifted the S-dollar band from to one implying a flat trend to one allowing for modest and gradual appreciation.  In October 2010, the currency band’s center was left unchanged, but the slope of the band was increased to allow for faster appreciation.  In April of the current year, the band’s center was raised, while its width and slope were left as they were.  All three times, monetary policy in Singapore was effectively tightened.  After this month’s review, however, that bias was reversed.

Today’s announcement from MAS does the opposite of its action a year ago.  Bandwidth and band center remain the same, but the currency band’s new slope will not be as steep as before.  That should allow the Singapore dollar to continue appreciating over the medium term but more slowly than before.  Headline inflation of 5.6% in July-August has been elevated, but policymakers pay most attention to core CPI, which at 2.2% “has been significantly lower than headline inflation since the middle of 2010.”

Besides contained core inflation, the shift today in the bias of Singapore monetary policy was influenced heavily by the worsening global economic environment:

Given the stresses and fragility in the advanced economies, the prospects for growth in Singapore‚Äôs major trading partners have deteriorated.  With the slowdown in demand, growth in the Singapore economy could fall below its potential rate of 3-5%.  Thus, core inflation should ease next year, although headline inflation could stay elevated in the near term reflecting the higher imputed rental cost of owner-occupied housing.

MAS will continue with the policy of a modest and gradual appreciation of the S$NEER policy band in the period ahead.  However, given the expected moderation in core inflation, the slope of the policy band will be reduced, with no change to the width of the band and the level at which it is centered.

Officials expect GDP to advance about 5% this year, implying deceleration from on-year increases of 6.3% in the second quarter and 5.9% in the third quarter of the year.  Growth has been led by manufacturing, which climbed 13.2% between 3Q10 and 3Q11.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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