MAS Annual Report 00/01 - Monetary Policy In FY2000/2001

Amidst the shifting economic landscape in FY2000/2001, MAS remained vigilant in tracking external and domestic developments. In particular, MAS closely monitored price pressures in the economy, in view of the strong upsurge in international commodity prices during the year, as well as the tightening of the domestic labour market in line with the robust economic growth.

The Singapore economy picked up rapidly in the first half of 2000, driven by the favourable external environment as well as strengthening domestic demand. With growth momentum expected to continue, CPI inflation was forecast to rise in line with the tightening of the labour market. In this context, MAS decided early in 2000 to embark on a gradual tightening of monetary policy. This involved the adoption of a target path for the exchange rate that allowed for a modest, trend appreciation of the Singapore Dollar on a trade-weighted basis. The nominal effective exchange rate (NEER) trended upwards for most of 2000, reaching the upper bound of the policy band by the end of the year. (See Chart 1).

In the event, the Singapore economy surged in the second half of the year, accompanied by a tightening of the labour market and a rise in domestic inflationary pressures. MAS therefore decided in January 2001 to reaffirm its policy of allowing the Singapore Dollar exchange rate to fluctuate within a target band that provided for a gradual and modest appreciation of the NEER. The policy remained aimed at capping medium-term inflationary pressures, while continuing to be supportive of economic activity, with growth coming off its cyclical high and in light of the uncertainties in the external climate. Since the beginning of 2001, although the policy band was unchanged, the NEER was allowed to trend downwards to the lower half of the band, reflecting a shift in the underlying economic and market conditions.

In particular, sentiments on the Singapore Dollar turned bearish following reports of a sharp slowdown in the Singapore economy, and expectations of strong demand for US dollars to fund merger and acquisition activities by domestic corporates. This was exacerbated to some extent by a marked strengthening of the US Dollar against all major currencies in March. On a bilateral basis, in the period under review, the Singapore Dollar depreciated against the US Dollar but generally strengthened against the Yen and Euro and most regional currencies. (See Chart 2).