SINGAPORE – The Monetary Authority of Singapore (MAS) said on Monday (March 30) that it will set the rate of the Singapore dollar’s appreciation to zero per cent at the prevailing lower level of its exchange policy rate band, given that the economy will contract sharply this year.
The aggressive policy easing was widely expected by analysts after the Government forecast the economy will shrink by 1 per cent to 4 per cent this year.
“GDP growth will eventually recover following the abrupt downshift in the level of activity, but there is significant uncertainty over the depth and duration of this recession,” the MAS added.
What are monetary policies?
Monetary policies control inflation, the consumption of goods and services, and liquidity, among other economic objectives.
They can also be an indicator of how optimistic the Government is about the economic outlook.
For example, in an economic downturn, the central bank might want to depreciate the currency to make its exports more attractive to foreign buyers.
But such a move will also cause imports to be more expensive for residents, which could discourage them from consuming goods and services.
What is the monetary policy in Singapore?What is the S$NEER?
In Singapore, the MAS is the central bank that regulates the Singapore dollar by weighing its value against a basket of currencies, which it does not reveal to prevent speculation.
Its aim is to keep the Singdollar’s value stable in the middle-term, which could mean in the next two and five years.
The MAS sets boundaries, or what it calls a policy band, within which the Singdollar’s value is allowed to appreciate and depreciate.
The band is also called the Singapore Dollar Nominal Effective Exchange Rate or S$NEER.
The MAS intervenes when the Singdollar’s value goes beyond the band’s boundaries. It will then buy or sell the currency to return the value of the Singdollar to its existing confines.
It also changes the slope, width and mid-point of the policy band based on assessed risks to the country’s growth and inflation, and announces these changes at its two scheduled policy meetings. These meetings typically happen in April and October, unless otherwise necessary. MAS brought forward its its April statement to March 30.
So what did MAS do this time?
Think of a pilot charting a plane’s course and starting point.
The MAS on Monday did two things: It set the Singdollar rate of appreciation at zero by flattening the slope of the band. This is an easing from its previous stance of a “modest and gradual appreciation” of the Singdollar. The slope of the band determines how quickly the Singdollar appreciates. A sharper slope translates to a quicker appreciation of the currency, just like how a steeper gradient will allow the plane to reach its desired height faster. With a zero slope, the pilot is now flying level with the ground.
The MAS also effectively lowered the midpoint of the currency band, similar to how a pilot might decide to move the entire flight path of the plane a little lower .
MAS said it will adopt a zero per cent appreciation path for the Singdollar starting at the prevailing level of the S$NEER, which has already weakened to a level slightly below the mid-point of the policy band.”
“This policy decision hence affirms the present level of the S$NEER, as well as the width and zero per cent appreciation slope of the policy band going forward, thus providing stability to the trade-weighted exchange rate,” the MAS said.
There was no change to the width of the band, which controls how far the Singdollar can fluctuate.
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