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Analysing MAS's decision to keep monetary policy unchanged



(http://www.cnbc.com/2017/04/12/singapore-central-bank-holds-singapore-dollar-policy-band-steady.html)

According to the MAS monetary statement in Apr 2017 as reported by CNBC, MAS is adopting a neutral exchange rate policy - also known as the monetary policy, centred on the zero appreciation of the Singapore Dollar (SGD).

The rationale for this move is due to a weak global economic climate, whereby the trading partners of Singapore is recovering slowly from the recession, and hence while our trading partners are enjoying economic growth, it is not considered robust enough. Naturally, the exports of SG to these countries have been rising but at a sluggish rate.

While many students will mistakenly assume that the SGD will not move, as implied by the word "zero appreciation", it is wrong to think or even suggest so. Rather it is the exchange rate policy band that remains unchanged, and hence the centre-line of the exchange rate policy band does not change.

With a constant or neutral exchange rate policy band, while exports rise slowly on the back of the weak global economy, the SGD is still expected to rise slowly against the currencies in our exchange rate index (i.e. USD, Yuan, Euro, Ringgit etc).

The main purpose of the keeping the exchange rate policy band unchanged is to prevent the SGD from breaching the upper limit of the policy band, and hence weaken export price competitiveness as exports become more expensive in the foreign currency as the SGD rises due to the rise in exports. In other words, it is to help maintain export price competitiveness, thereby supporting the export-driven growth in Singapore.

However, should global economic conditions strengthen with a more robust recovery of Singapore's trading partners in the near term, we can expect the MAS to revalue the exchange rate policy band to allow for a gradual and modest appreciation of the SGD to curb inflationary pressures.

To find out more about the conduct of monetary policy in SG, do join our economics tuition classes or consult our economics tutor Mr. Clive Foo at econsactually@gmail.com

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