Content      
HOME
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
 
  INTERNATIONAL FINANCIAL MARKETS: RESILIENCE IN
THE FACE OF UNCERTAINTIES
 
Since April 2005, international financial markets performed well despite sustained high oil prices and continued monetary policy tightening. Financial markets were also resilient in the face of shocks and uncertainties such as the Katrina hurricane disaster in the US, terrorist bombings in London, and more recently, the risk of a global avian flu outbreak. Financial markets also reacted calmly to the ending of the Bank of Japan’s (BOJ) quantitative easing policy in March 2006.

While equity markets were weighed down periodically in the course of the year by concerns of high energy prices and rising interest rates, they were lifted in the later part of 2005 and early 2006 by buoyant corporate profits and optimism about global growth prospects (See Chart 4). Foreign capital flows into emerging markets in search of higher yields also supported Asian equities. However, global equity markets came under heavy selling pressure in May 2006 triggered by concerns over heightened inflationary pressures in the US. The spectre of potentially higher US interest rates also triggered worries about a slowdown in the US economy and consequently, the demand for Asian exports. The episode however, does not appear to be the result of a shift in fundamental factors, and the general lack of discrimination across sectors or countries suggests that the rise in net foreign selling was triggered by external factors not unique to Asia.


On the whole long-term government bond yields in developed markets remained low. The low risk premiums has been attributed to both cyclical as well as structural factors such as well-anchored inflationary expectations, weakness in global investment and a structural shift of pension and life insurers towards longer-term maturity assets. However bond yields have generally moved up since the middle of last year amid signs of robust growth in the US economy as well as on the back of inflationary concerns. Yields in the US have risen above 5% while yields in Japan have also increased as the BOJ announced an end to its quantitative easing policy (See Chart 5).


After a brief period of correction during February and March 2005, Asian bonds rallied over April 2005 to January 2006 as investors continued to search for yields in the low interest rate environment. Continued inflows helped support Asian bonds as investor risk appetite remained supportive of emerging market papers, although the heightened volatility in world financial markets in May this year have led to some reversal of these flows (See Chart 6).


In the foreign exchange market, the USD strengthened over a large part of 2005 driven by increasing interest rate differentials as the US Federal Reserve (Fed) continued to raise the Fed Funds rate over the course of the year. Since December 2005, however, concerns over the sustainability of the US current account deficit have heightened as the Fed Funds rate draws closer to neutral territory, leading to a general weakening trend of the USD. The USD appreciated briefly against the Euro and Yen in late January and early February 2006 on expectations of continued increases in interest rates by the US Fed, amidst indications of underlying economic strength. In May, the USD appreciated again, driven by expectations of further interest rate increases as the Fed strongly reaffirmed its commitment to maintaining price stability. (See Chart 7).


Click to Top