Singapore central bank keeps monetary policy unchanged

On October 14, Singapore's central bank, the Monetary Authority of Singapore (MAS), kept its monetary policy unchanged, defying expectations of a tightening. This decision came as the economy was anticipated to grow robustly and inflation was expected to ease from mid-2027. Singapore's central bank employs a unique approach to monetary policy management, manipulating the exchange rate of its currency rather than altering domestic interest rates, as is common in many other economies.

The MAS determines the trajectory of what it calls the policy band of the Singapore dollar nominal effective exchange rate (S$NEER), thereby either strengthening or weakening the local currency against those of its primary trading partners. As a small, trade-dependent economy, Singapore's gross exports and imports of goods and services exceed three times its gross domestic product (GDP), with about 40 cents of every Singapore dollar spent domestically on imports.

This high level of imports makes the exchange rate a significant factor in influencing inflation, as an appreciation of the Singapore dollar against the currencies of its major trading partners reduces the cost of imported goods and services, thereby lowering household expenses. The S$NEER is an index that measures the trade-weighted exchange rate of the Singapore dollar against the currencies of Singapore's key trading partners.

The MAS does not fix the specific level of the exchange rate or control it continuously. Instead, it allows the S$NEER to fluctuate within a predetermined policy band, with the exact range kept confidential. Should the exchange rate move beyond this band, the MAS intervenes by purchasing or selling Singapore dollars. The policy band is composed of three adjustable parameters - the slope, the level, and the width.

Until 2024, these parameters were reviewed at least twice a year, typically in April and October, with additional reviews possible in response to immediate changes in conditions, such as high inflation in 2022, which led to two off-cycle adjustments. Starting from 2024, the MAS has begun to release monetary policy announcements quarterly, enabling policymakers to offer a more timely assessment of the economic outlook.

The three policy tools available to the MAS are the slope, the level, and the width of the policy band. Modifying the slope influences the rate at which the Singapore dollar appreciates or depreciates. Adjusting the level, or the midpoint of the policy band, enables a swift strengthening or weakening of the S$NEER, serving as a tool for extreme situations like a recession. By widening the policy band, the MAS can permit greater fluctuations in the S$NEER.