Monetary Authority of Singapore Annual Report 2011/2012
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Singapore's macroeconomic policies are formulated with a medium-term orientation, and are aimed at promoting sustained, non-inflationary economic growth. Chart 3 traces the evolution of monetary policy, as indicated by movements in the S$ nominal effective exchange rate (S$NEER), against the backdrop of developments in growth and inflation. MAS' policy responses to global and domestic developments underscore the role of the S$ exchange rate as an anchor of stability.

The Singapore economy expanded by a firm 4.9% in 2011, which kept resource markets tight even as supply-side restructuring measures were stepped up. Monetary and fiscal policies remained on a broadly tightening bias, but were deliberately calibrated to accommodate the economic restructuring measures aimed at raising productivity over the longer term.

MAS tightened monetary policy in April 2011 by re-centring the S$NEER policy band upwards to a level below the prevailing S$NEER, with no change to its slope or width. This adjustment in the monetary policy stance took into account MAS' previous pre-emptive tightening moves in 2010, and also allowed a part of the relative cost increases in labour and commodities to filter through to the rest of the economy. In October 2011, MAS kept the exchange rate policy band on a modest and gradual appreciation path, but reduced the slope of the band without altering its width or the level at which it was centred. At that point, there was heightened uncertainty in the global economy and domestic economic activity was expected to slow, thus moderating core inflation pressures. In April 2012, MAS increased the slope of the policy band slightly, without changing the level at which the band was centred. The policy band was also restored to a narrower setting. At that point, the tail risks to growth had receded, while domestic inflationary pressures remained persistent, with firms continuing to pass through cost increases to consumer prices. The tighter policy stance was intended to temper but not fully offset this pass-through, so as to facilitate the ongoing supply-side cost adjustments. It also aimed to anchor inflation expectations, and keep growth on a sustainable path in the medium term.

The FY2012 Budget recognised that the cyclical moderation in growth had been accompanied by important structural shifts in the economy. It thus focused on tackling long-term challenges, namely, reconfiguring economic structures and enhancing social support, while helping to alleviate the adjustment costs for both businesses and households.

Chart 3