ECONOMIC DEVELOPMENTS
AND MONETARY POLICY
     
Content Page
 
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US: Vibrant Pace . Europe: Mixed
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Box 15 – Debunking the Deflation Myth in Singapore . International Financial Markets: Broad Recovery Amid Uncertainty
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Box 16 – Exchange Rate and Macroeconomic Volatility . Monetary Policy in an Increasingly Volatile Environment
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Recent Policy Research and Analysis Against the Backdrop of More Frequent Shocks . Box 17 – Creating an Electronics Leading Index
 
Monetary Policy in an Increasingly Volatile Environment
 
The eventful recovery path of the Singapore economy represented a major challenge to MAS on the policy making front. Against this setting, we adopted a flexible approach in terms of monetary policy management. Chart 27 below shows the timeline of the various monetary policy reviews by MAS in 2003 and 2004.
 
Amid the general climate of cost reduction (for example the Central Provident Fund cuts) and the slack in the domestic economy in 2003, MAS has allowed the exchange rate to adjust to the low cost environment to give the domestic economy adequate support. In particular, in July 2003, we re-centred the exchange rate policy band at the prevailing level of the trade-weighted S$, while maintaining a zero per cent appreciation of the trade-weighted S$ policy path, with no change in the width of the band. The re-centring of the policy band at a lower level represented an easing of the monetary policy stance, which was assessed to be appropriate in supporting the incipient recovery in the Singapore economy in a low inflation environment. Against the backdrop of a soft global interest rates environment, coupled with the easy domestic liquidity conditions, interest rates have remained low throughout 2003.

However, as signs of a firmer and more broad-based economic recovery emerged in late 2003, coupled with a potential rise in inflationary pressures, MAS signalled a shift in policy from a zero per cent appreciation path to a policy of modest and gradual appreciation of the trade-weighted S$, starting from the mid-point of the policy band in April 2004. This policy stance was assessed to be supportive of economic growth, while ensuring low and stable inflation over the medium-term (See Chart 27).
 
Enhancing Risk-focused Supervisory Approach
Box 1 – Fostering a Sound and Progressive Financial Services Sector
Enhancing MAS’ Supervisory Capabilities
Box 2 – Stress Testing of Life Insurers
Box 3 – Streamlining Inspection Function
Thematic Inspections to Improve Surveillance