Monetary policy in Singapore is implemented by steering the exchange rate relative to a target band, which is unannounced but nevertheless broadly understood by market participants. The Monetary Authority of Singapore expresses policy in terms of the slope of the exchange rate band, its width of the band and the level at which it is centred. As was widely expected, at its meeting on 29 January, the MAS left all three dimensions of policy unchanged. The aim of policy will thus remain to seek a gradual strengthening of the Singapore dollar to limit the prices of imports and lower domestic inflation. (Recent monetary policy decisions are shown in the table in the appendix.1)
The figure below shows that the MAS kept the nominal effective exchange rate level unchanged as the Covid pandemic started in 2020. The MAS subsequently allowed it to strengthen through a combination of adopting an upward-sloping target band and by resetting the level at which the target band is centered. Overall, this encouraged the exchange rate to appreciate by about 10% between 2020 and early 2024.
Investment Insights • MFN
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The Monetary Authority of Singapore leaves policy unchanged
As widely expected, at its meeting on 29 January, the Monetary Authority of Singapore (MAS) decided to leave policy unchanged for the third straight time. Policy will thus continue to aim for a gradual strengthening of the Singapore dollar to reduce import prices and lower inflation. In this Macro Flash Note, EFG chief economist Stefan Gerlach looks at economic conditions in Singapore and MAS policy.
Chart 1. Nominal effective exchange rate index
Source: Monetary Authority of Singapore. Data as at 29 January 2024.
Despite the strengthening of the exchange rate, headline and core inflation in Singapore rose sharply from the start of the Covid pandemic to peaks of 7.5% and 5.5%, respectively. Headline inflation has declined since 2022 and core inflation since 2023. Nevertheless, at between 3% and 4%, both remain too high. This has warranted a continued restrictive policy that the MAS will likely maintain with the goal of lowering inflation pressures in the coming months. The MAS projects both headline and core inflation to decline to 2.5–3.5% in 2024.
Chart 2. Headline and Core inflation
Source: Monetary Authority of Singapore and Statistics Singapore. Data as at 29 January 2024.
Turning to GDP growth, preliminary estimates indicate that it rose to 1.7% quarter-on-quarter 2023 3Q, from 1.3% in the second quarter, due largely to the external sector. The MAS expects GDP growth to continue to strengthen in 2024, with growth projected to be between 1–3%.
Chart 3. GDP growth in chained (2015) dollars
Source: Statistics Singapore. Data as at 29 January 2024.
Overall, with growth expected to strengthen and inflation to decline in 2024, the MAS has indicated that it feels the current stance of monetary policy remains appropriate. This outlook is of course dependent on the external environment. The risks are manifold. For instance, the dramatic global monetary policy tightening could lead to a sharp growth slowdown, warranting an easier policy stance in Singapore. Alternatively, the broadening and strengthening of geopolitical tensions in the Middle East may lead to upward pressure on energy prices and a tightening of supply constraints that could provide a powerful impetus to inflation. In this case monetary policy in Singapore might need to be tightened.
Appendix. MAS policy decision
Note: Meetings in italics were unscheduled. NEER denotes the nominal effective exchange rate.
Source: Monetary Authority of Singapore. Data as at 29 January 2024.
1For a discussion of MAS’ monetary policy strategy, see “Singapore’s successful monetary policy turns 40”, by Stefan Gerlach, 6 May, 2021.