CONTENTS
HOME
OUR WORK - Managing Risks, Sustaining Growth
A MORE CHALLENGING POLICY ENVIRONMENT
MONETARY POLICY - PROVIDING AN ANCHOR FOR PRICE STABILITY OVER THE MEDIUM-TERM
MANAGING THE CHALLENGES OF INCREASED GLOBAL FINANCIAL UNCERTAINTY
A SOUND AND PROGRESSIVE FINANCIAL CENTRE
CURRENCY
 
MONETARY POLICY
- PROVIDING AN ANCHOR FOR PRICE STABILITY OVER THE MEDIUM-TERM
15
 
Enhancing Monetary Policy Research 16
 
Box Story 1 - Asia Decoupling? 18
 

MONETARY POLICY - PROVIDING AN ANCHOR FOR PRICE STABILITY OVER THE MEDIUM-TERM

Against the continuing uncertainty in the external economic environment, it is important for monetary policy to stay focused on its core objective of price stability in the medium-term. A low and stable inflation environment continues to provide the best foundation for sustainable growth.

MAS' monetary policy responses to the shifts in global and domestic growth and inflation dynamics over the last few years are illustrated in Chart 1. The policy of targeting a modest and gradual appreciation of the S$NEER has been in place since April 2004. This served to cap incipient inflationary pressures as the output gap narrowed and then turned positive in 2006, following the recovery from a series of negative external shocks between 2001 and 2003.

With the acceleration in global inflation and domestic cost pressures in second half of 2007, MAS shifted to a policy of a slightly steeper rate of appreciation of the S$NEER at the October 2007 policy review despite emerging evidence of weakening external demand. Subsequently in April 2008, MAS re-centred the exchange rate at the prevailing level of the S$NEER to moderate inflation against the backdrop of continuing external and domestic price pressures and to provide support for sustainable growth over the medium term.

The cumulative appreciation of the S$NEER to date has been quite significant. Between April 2004 and April 2008, the S$NEER appreciated by 11.4%. This has directly dampened external price pressures. For instance, over the period from 2004 to Q1 2008, the 12% increase in food prices in Singapore was estimated to be about half the rate experienced by our principal trading partners. Similarly, the prices of domestic energy-related items would have risen by a larger extent if not for the strengthening S$NEER. At the same time, the stronger S$NEER has an indirect effect in easing domestic cost pressures by closing the output gap, which is estimated to narrow to 0.8% of potential GDP in 2009, compared to 2.3% in 2007. Given the inherent lags in the price transmission process, the effects of the appreciation in the S$NEER will continue to moderate cost and price pressures in the periods ahead.

Meanwhile, the Singapore Government has introduced measures on the supply side to meet the short-term needs of industries. To address immediate space constraints and high rentals, the government has released some interim office space supply and HDB flats for rent. The Ministry of National Development has also been releasing land, which will result in more than 42,000 private residential units and 640,000 square metres of office space coming onstream by 2010. On the manpower front, the government is looking into more ways to help older Singaporean workers and women take advantage of the strong employment market and rejoin the workforce, while gaps in the workforce will continue to be filled by foreign workers. This multifaceted, multipronged approach to dealing with cost and price pressures complements monetary policy and is more holistic than relying on monetary tightening alone to reduce and stabilise the rate of inflation.

These measures will ensure that Singapore is well positioned in the medium-term to take advantage of an upturn in the global economy and growing opportunities within Asia.