Since 2007, macroeconomic conditions have evolved rapidly around the world, presenting challenges for monetary policy formulation. The global economy has shifted quickly from a position of buoyant growth and muted inflationary pressures in early 2007, to a state of faltering growth and surging commodity prices in mid-2008, followed by a sharp downturn at the end of 2008. MAS' policy responses to these global developments have been deliberately graduated and are underpinned by the importance of maintaining a medium-term orientation and ensuring that the S$ remains an anchor of stability, especially in times of heightened uncertainty (Chart 3).
In October 2007, MAS tightened the monetary policy stance by allowing a slightly steeper appreciation of the S$ nominal effective exchange rate (S$NEER) policy band. This was followed by an upward re-centering of the band to the prevailing level of the S$NEER in April 2008. Both external and domestic price pressures had strengthened as a result of rapid increases in global commodity prices and a build-up in domestic cost pressures.
In October 2008, MAS shifted to a zero per cent appreciation of the S$NEER policy band, eliminating the crawl which had been in place since April 2004. The decision reflected the moderation of inflation from its peak in mid-2008, and also the higher risk of a further deterioration in the external outlook after September 2008, following the escalation of turbulence in global financial markets. This was a calibrated response to heightened uncertainty, allowing MAS scope to refine its policy in subsequent time periods as conditions changed.
Since the latter half of 2008, the S$NEER has eased to the lower half of the policy band, in line with weakening growth in the Singapore economy and diminishing inflationary pressures. Accordingly, MAS announced on 14 April 2009 that it would re-centre the exchange rate policy band to the prevailing level of the S$NEER, while maintaining its width and zero per cent appreciation path.
A counterfactual analysis conducted for the April 2009 monetary policy statement further confirmed that MAS' graduated approach was appropriate in a climate where elevated inflationary pressures were giving way to
weakening growth amidst heightened global uncertainty. The simulations showed that, had MAS steepened the slope of the policy band by a greater amount in October 2007, this tighter policy would not have had an immediate impact on the high headline inflation rate, but consumer prices would have fallen by a larger amount in the ensuing period. Moreover, this sudden tightening in monetary policy and the lags involved would have exacerbated the economic downturn in late 2008.
Singapore's monetary policy has been complemented by its fiscal policy. In the latest Budget, a $20.5 billion Resilience Package was unveiled. This expansionary Budget, which featured the Jobs Credit Scheme, aimed to save jobs, enhance the cash flow and competitiveness of firms, support families, and strengthen the economy's long-term capabilities. The coherent and complementary nature of these macroeconomic policies will not only provide a buffer against the present downturn, but will also help to prepare the Singapore economy to capitalise on growth opportunities when the global economy finally recovers.