Monetary Policy in Singap: Objectives, Framework and Rationale Pe Comune AC at the Annual JC Seminar 2012 ea Outline of Presentation Price Stability Definition and Measure ‘The Exchange Rate as the Instrument for Monetary Policy Why the Exchange Rate? The “BBC” System Features of the Band, Basket and Craw! Monetary Policy in Action Monetary Policy Statement, April 2012 = Medium-Term Price Stability The principle object ofthe Authority shall be. to maintain price stability conducive t sustainable growth of the economy.” - MAS Act Ultimate Objective ] Stability as the Basis for Sustained Economic Growth | a Intermediate Target of Monetary Policy ) | "For all practical purposes, price stability means that expected changes in the average price level are smal and gradual enough that they do not materially ‘influence the economic decisions of businesses and households.” Alan Greenspan, Former Chairman ofthe US Federal ReserveImportance of Price Stability Efficient col peer Sen) Paver Eliminates: Rac au) Cems Ee Pema Create borrowing cost EQ MAS is primarily concerned with Core Inflation. arate Serena Hey herpes: ‘4 PointContbtion price and cost measures that underpin pressures in the economy. nex (at 190 aHX) Divergence between inflation measures and experience SOE CPLAIIItems = MAS. Inflation 52% 29% Nature of the CPt 1 Gonstruct \ pray oa Outline of Presentation figures capture my actual Inflation experience’ Representative cer) rr 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 Craw! Monetary Policy in Singapore Processes and Recent Decisions eee SESS SESS En Why is the exchange rate the ideal monetary policy instrument In Singapore? ile oA Set Brey DUC Broa ec SRC ue oa irra cae) Bec Rosie ee once)ES) Ss Singapore is a highly trade- dependent economy. Singapore is completely open to capital flows. we 8 98 OB 201103 x) The Policy “Trilemma” aa ey batty Exchange Rate ContegYOver ‘Stability Intergbt RateExchange rate policy affects inflation through two channels. Foreign prices of imported ‘Coat pressures due to demand consumer goods for Singapore's exports Pears er ud aoe Rees Cerca) Peach Crue ocg Pea ist lowers import prices. Imported foreign Derived demand Inflation channel channel (Dhrect channel) (indirect channel) EO Singapore’s inflation rate has been lower and more stable than the OECD. te ‘a BO ao 971-1900 t98.2010 ‘Standard Deviation of nition (1) = 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 Craw! Monetary Policy in Singapore Monetary Policy Statement, April 2012Characteristics of Singapore’s Exchange Rate System The exchange rate is managed against a trade- BASKET _ 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 BAND an undisclosed policy band Absorbs short-term market volatility, provides flexibility in managing the exchange rate The policy band itself is adjustable and allowed CRAWL to “craw”, reflecting underlying fundamentals Prevents misalignment in the currency MAS buys and sells S$ against foreign currencies to keep the the policy band. | SSNEER wi [ss epercition SSSNEER Index eaten nent ca ical or mes [J Policy Lever (1): Slope of policy band Pa oe J stanerecaion SSSNEER IndexPolicy Lever (2): Width of policy band SSSNEER Index: HE) «Policy Lever (3): Level of policy band SSSNEER Index x Outline of Presentation Price Stability Definition, Rationale and Measure ‘The Exchange Rate as the Instrument for Monetary Policy Rationale | mheBec* system | Features of the Band, Basket and Craw! | | Monetary Policy in Singapore Monetary Policy Statement, April 2012 LdThe monetary policy decision involves a. assessment of the balance of risks to growth and inflation. HQ) Monetary Policy Decision, Apr 2012 ee ‘ot potenta GOP Ea ee rr NE Monetary Policy Statement 13 April 2012 3. ‘The Singapore economy has f this year. With economic activity turning out somewhat stronger ated in Qi 2012 and resource markets tightening further, core infationary pressures have persisted. 6. The outlook for the global economy remains subdued, but the most significant risks have been contained. Against. these developments, the Singapore economy will experience modest grovith of 1-38 in 2012. Looking ahead, external inflationary pressures ae likely to be sustained, largely due to higher oll prices. Domestically, the labour market remains tight 9. MAS will therefore continue with the policy of a modest and gradual appreciation of the SSNEER policy band. The slope willbe increased slightly, ane there will be no change to the level at which the band is centred. This policy stance will help anchor inflation expectations, ensure medium-term price stability, and keep growth on a sustainable pathEpilogue: The interest rate versus exchange rate debate Tit Thank You