here - Economic Society of Singapore

Monetary Policy in SingaporeObjectives, Framework and RationalePresented byDr Choy Keen Meng, Principal EconomistEconomic Policy Group, MASat the Annual JC Seminar 2013

Outline of PresentationThe Objective of Price StabilityDefinition and ImportanceThe Exchange Rate as the Instrument for Monetary PolicyWhy the Exchange Rate?The “BBC” SystemFeatures of the Band, Basket and CrawlRecent Economic Developments and Current IssuesGrowth, Inflation and Economic Restructuring

Medium-Term Price Stability“The principle object of the Authority shall be ... to maintain price stabilityconducive to sustainable growth of the economy” – MAS ActUltimate Objective:Price Stability as the Basis for Sustained Economic GrowthIntermediate Target of Monetary Policy:Interest Rate/Exchange Rate“For all practical purposes, price stability means that expected changes in theaverage price level are small and gradual enough that they do not materiallyinfluence the economic decisions of businesses and households.”- Alan Greenspan, Former Chairman of the US Federal Reserve

Importance of Price StabilityLow and Stable InflationEliminatesuncertainty frominterpreting pricesignalsLower incidenceof unprofitableborrowing andlending decisionsEfficientAllocation ofEconomicResourcesEncouragesSaving andInvestmentLess uncertaintyover returns onlong-terminvestmentLower riskpremium andreducedborrowing costEconomic Growth

Outline of PresentationThe Objective of Price StabilityDefinition and ImportanceThe Exchange Rate as the Instrument for Monetary PolicyWhy the Exchange Rate?The “BBC” SystemFeatures of the Band, Basket and CrawlRecent Economic Developments and Current IssuesGrowth, Inflation and Economic Restructuring

The Open Economy “Trilemma”“The point is that you can't have it all: A country must pick two outof three. It can fix its exchange rate without emasculating itscentral bank, but only by maintaining controls on capital flows (likeChina today); it can leave capital movement free but retainmonetary autonomy, but only by letting the exchange rate fluctuate(like Britain-or Canada); or it can choose to leave capital free andstabilize the currency, but only by abandoning any ability to adjustinterest rates to fight inflation or recession (like Argentina today).”Open Capital AccountTheorem of theImpossibleTrinity“ManagedFloat”Exchange RateStabilityControl OverInterest Rate

Why is the exchange rate the idealmonetary policy instrument InSingapore?The exchange rate is the idealmonetary policy instrument inSingapore because:• It is relatively controllableby the MASSmallEconomywith NoNaturalResources• It has a strong and stablerelationship with domesticinflation• It is suited to Singapore’seconomic circumstancesHigh Degreeof Opennessto TradeHigh DegreeofOpennessto CapitalFlows

% of GDPSingapore is highly trade-dependentand completely open to capitalflowsS$ BillionTrade-to-GDP RatioAssets in Banking Sector2102500190Exports200017015015001301109070Imports1000500AsianDollarMarket5065 73 81 89 97 050Domestic70 77 84 91 98 05 2011Q3

Exchange rate policy affectsinflation through two channelsForeign prices of importedconsumer goodsCost pressures due to demandfor Singapore’s exportsS$NEER translatesforeign price ofimports into S$.A stronger S$NEERlowers import prices.S$NEER affects exportdemand, therebyinfluencing demand for(and prices of) factorinputs.Imported foreigninflation channel(Direct channel)Derived demandchannel(Indirect channel)CPI Inflation

YOY % GrowthSingapore’s inflation rate has beenlower and more stable than theOECDStandard Deviation of Inflation (%)25CPI Inflation9Volatility of CPI Inflation20Singapore87OECDSingapore1561050OECD54321-51971 1981 1991 2001201001971-1980 1981-2010

Outline of PresentationThe Objective of Price StabilityDefinition and ImportanceThe Exchange Rate as the Instrument for Monetary PolicyWhy the Exchange Rate?The “BBC” SystemFeatures of the Band, Basket and CrawlRecent Economic Developments and Current IssuesGrowth, Inflation and Economic Restructuring

Characteristics of Singapore’sExchange Rate SystemBASKETThe exchange rate is managed against a tradeweightedbasket of currencies of our majortrading partners and competitorsMitigates volatility of international foreignexchange marketsBANDThe trade-weighted S$ is allowed to float withinan undisclosed policy bandAbsorbs short-term market volatility, providesflexibility in managing the exchange rateCRAWLThe policy band itself is adjustable and allowedto “crawl”, reflecting underlying fundamentalsPrevents misalignment in the currency

S$NEER IndexMAS buys and sells S$ againstforeign currencies to keep theS$NEER within the policy bandS$ appreciationWhen the $NEER rises above theupper bound of the band, MASintervenes by selling S$.When the $NEER falls below thelower bound of the band, MASintervenes by buying S$.Time

S$NEER IndexPolicy Lever (1):Slope of policy bandIncrease the pace of appreciationS$ appreciationNormally undertaken whenMAS assesses that the trajectory foreconomic activity in the mediumterm is on an upward path.Date

S$NEER IndexPolicy Lever (2):Width of policy bandWiden policy band in view of volatility across int’l financial marketsS$ appreciationNormally undertaken whendevelopments cause a short-termincrease in S$NEER volatilityDate

S$NEER IndexPolicy Lever (3):Level of policy bandRe-centre policy band at current level of S$NEERS$ appreciationNormally undertaken whendevelopments cause an abruptshift in the pathof economic activityDate

Outline of PresentationThe Objective of Price StabilityDefinition and ImportanceThe Exchange Rate as the Instrument for Monetary PolicyWhy the Exchange Rate?The “BBC” SystemFeatures of the Band, Basket and CrawlRecent Economic Developments and Current IssuesGrowth, Inflation and Economic Restructuring

The monetary policy decision involves anassessment of the balance of risks togrowth and inflationCPIInflationSingaporeEconomyGDPGrowthBalance of RisksOptimal Policy Path

YOY% GrowthUncertainties remain in the globaleconomy although tail risks have recededConsensus GDP Forecasts76543210-11.82011 2012 20135.9 5.75.12.21.81.5-0.5-0.3US Eurozone Asia ex-JapanModest growth in the US• Economic data indicatemodest recovery• Housing picking up• Lingering fiscal concernsRecession in the Eurozone• Economic indicatorspoint to continuedcontraction• Financial situation stillfragileResilient growth in Asia• China driving recoveryin intra-regional trade• Strong domesticdemand in ASEAN

Index (Q1 2010 = 100), SAThe Singapore economy is expected toexpand by 1–3% this yearStylised GDP Profile113Forecast111110109108106• External demandlikely to remainweak, thoughcyclical headwindsmay subside• Domestically,supply-sideconstraints will limitgrowth upside1052011 Q2 Q3 Q4 2012 Q2 Q3 Q4 2013 Q2 Q3 Q4

% YOYMore recently, inflation has risen aboveits historical average% Point Contribution86CPI and MAS Core InflationCPI-All ItemsInflation86Contributions to YOY InflationCarsAccommodationServicesFoodOthersOil-related4MAS CoreInflation4202002-11 Average CPI-All Items Inflation20-22007 2008 2009 2010 2011 2012 2013Jan-Feb-22001-09 2011 20122013Jan-Feb

Index (4-8 Apr 2011 Average=100)108MAS maintained its monetary policy stance inOctober 2012 of a modest and gradualappreciation of the S$NEERS$ Nominal Effective Exchange Rate (S$NEER)106Appreciation104102100989694DepreciationApr Jul Oct Jan Apr Jul Oct2011 2012

What are the sources of inflationarypressures?Sources of inflationary pressuresDemand-side pressuresSupply-side pressuresFirm regional demand forSingapore’s servicesResource constraints inlabour and housingRobust domestic labourmarket supportingconsumptionStructural change in theSingapore economy toproductivity-led growthSustained low globalinterest rates and capitalinflowsAssetpricesTemporary shortages inhousing

The Role of Monetary Policy inEconomic Restructuring1. Monetary policy stance carefully calibrated to take into account the multipleinfluences.• Demand: Act decisively to moderate effects of strong demand.• Supply: Temper, but not fully offset cost pressures from permanent supplyshifts. These cost increases are part of the market’s process of guiding theeconomy to a more sustainable growth path.2. Monetary policy not used to directly target asset prices.• The global experience suggests that macro policy instruments havesignificant effect on the broader economy.• Instead macro-prudential tools and other administrative measures targetedat specific asset markets (e.g. property) are preferred.• However, MAS closely monitors asset prices for “second-round” effects onconsumer prices.3. A holistic, across-government approach to dealing with inflation is required.

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