Sunday, October 19, 2008

MAS U-turn after four years of strong Singapore dollar policy

Chart 1
Nominal Effective Exchange Rate (S$NEER)
The Monetary Authority of Singapore (MAS) is abandoning its strong dollar policy and is switching to a "zero-percent appreciation" policy to keep the Singapore dollar at current levels and not let it rise higher.

It's a complete U-turn for MAS, though it doesn't say so, abandoning a policy it has followed since April 2004, letting the Singapore dollar grow stronger, and there have been no recessions during that period. Singapore's last recession was in 2002.

The MAS Monetary Policy Statement does not give any other reason for the new policy except that inflation has peaked and that "the outlook for the global economy has deteriorated". But news agencies from Reuters to Bloomberg have been quick to note that the new policy will help Singapore exporters.

The strong dollar was used to fight inflation, which reached a 26-year high of 7.5 percent in April as food, housing and transportation costs soared, reported Channel NewsAsia.


Reuters recalls only six months ago, on April 10, "The central bank (MAS) unexpectedly tightened policy by moving up the centre of the band in which the Singapore dollar trades, the most aggressive tightening move available, analysts said."

But that was before the Wall Street meltdown. And now MAS is following central banks in Europe and America in loosening monetary policy. That's what Reuters and Bloomberg say.

Reuters gives the following chronology of MAS monetary policy measures. S$NEER stands for the Singapore dollar nominal effective exchange rate at which it trades against a basket of currencies.
  • Oct 10, 2008 - The central bank said it was shifting to a zero appreciation or neutral bias for the trade-weighted Singapore dollar, from a policy that allowed for gradual appreciation. It said there would be no change to the width or centre of the secret band.
  • Apr 9, 2008 - The central bank unexpectedly tightened policy by moving up the centre of the band in which the Singapore dollar trades, the most aggressive tightening move available, analysts said.
  • Oct 10, 2007 - The central bank said it would slightly increase the slope of its policy band but added it would maintain its policy of a 'gradual and modest appreciation' in the Singapore dollar.
  • Apr 10, 2007 - As expected, the MAS maintains its policy of a gradual and modest appreciation in the currency.
  • Oct 10, 2006 - As expected, the MAS maintains its modest appreciation policy of the trade-weighted Singapore dollar's nominal effective exchange rate (S$NEER).
  • Apr 11, 2006 - The MAS surprises markets when it leaves its monetary policy unchanged. Analysts had expected the central bank to give the Singapore dollar room to appreciate further.
  • Oct 11, 2005 - Maintains 18-month-old policy of allowing modest and gradual appreciation of the Singapore dollar. No change in the slope or width of the band.
  • Apr 12, 2005 - Maintains year-old tightening stance of allowing a stronger currency to curb inflation risks.
  • Oct 11, 2004 - Maintains tightening stance of modest and gradual appreciation to curb inflation risks.
  • Apr 12, 2004 - Tightens policy by allowing a modest and gradual appreciation of the S$NEER. The width of the band in which the currency is managed remains unchanged.

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