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OUR MISSION
OUR OBJECTIVES
 
ECONOMIC DEVELOPMENTS AND
MONETARY POLICY
D ECONOMIC DEVELOPMENTS AND MONETARY POLICY  
 
The World Economy: Robust Growth on  
the Strenght of the US Economy  
70
 
International Financial Markets: Resilience  
in the Face of Uncertainties
71
 
Singapore Financial System
 
Remains Sound  
74
 
Singapore Economy: Ending on a High Note  
74
 
Monetary Policy Amid Continued Growth  
and Emerging Inflationary Pressures  
77
 
Strengthening the Monetary Policy
 
Formulation Process  
77
 
Pushing the Frontier of Monetary Policy
 
Research and Analysis  
78
 
Box 16 – Assessing Market Response to  
MAS’ Monetary Policy  
79
 
  THE WORLD ECONOMY: ROBUST GROWTH ON THE STRENGTH
OF THE US ECONOMY
 
Despite higher oil prices, rising interest rates and natural disasters, the global economy expanded at a robust pace in 2005. This growth momentum continued unabated in the first quarter of 2006.

The strength of the US economy was a major factor underpinning the continued growth of the world economy last year. The US economy displayed remarkable resilience against the backdrop of hurricane Katrina and 11 successive increases in the Fed funds rate from 2.25% at the beginning of 2005 to 5% in May 2006. In the first quarter of 2006, growth picked up strongly, led by a rebound in consumer spending and business investment spending on equipment and software.

In Europe, private investment picked up sharply in 2005 as business confidence rose. This led to new job creation and a decline in the unemployment rate for the first time in four years. Concomitantly, in response to indications of a pick-up in core inflationary pressures, the European Central Bank hiked its policy rate by 75bp between December 2005 and June 2006 to 2.75%.

The Japanese economy expanded at a robust pace last year as it continued to reap the fruits of structural reforms. The expansion was broad based, with strong household consumption supported by significant gains in employment. Business investment also grew as profits rose, while exports benefited from firm global demand. Growth in the first quarter of 2006 continued to be held up by strong private domestic demand and exports.

Other Asian economies performed well despite higher energy prices and rising interest rates, as governments rolled back fuel subsidies and central banks tightened monetary policy to curb inflationary pressures. Domestic demand, particularly consumer spending, continued to play a significant role in fuelling economic growth in the region. Exports from the region also remained fairly strong despite some appreciation of the regional currencies against the USD. The transition to more flexible exchange rate regimes in China and Malaysia was smooth with no major impact on the regional financial markets.