Monetary Authority of Singapore Annual Report 2012/2013
Anchor of Economy

THE ECONOMY — GLOBAL, REGIONAL AND DOMESTIC

Monetary Policy

The Singapore economy saw a modest expansion in 2012, amid a softening in global economic activity. While the external-oriented sectors bore the brunt of the global downturn, domestic-driven sectors, such as construction and related financing and real estate activities, remained broadly resilient. This kept the resource markets tight. Notably, the economy remained at full employment even as the level of output continued to coverage to its underlying potential.

Against this backdrop, MAS tightened the monetary policy stance in April 2012 by increasing slightly the slope of the S$ nominal effective exchange rate (S$NEER) policy band, with no change to the level at which it was centred. This was a measured move to contain inflationary pressures, anchor inflation expectations and keep growth on a sustainable path while the economy restructures. The policy band was also restored to a narrower setting. Despite continued uncertainty about the outlook for the world economy, particularly with regard to Europe, the Singapore economy was projected to grow at a moderate pace in 2013. With persistent tightness in the labour market, this could exert some upward pressures on MAS Core Inflation. MAS thus maintained the April 2012 policy stance in the subsequent reviews in October 2012 and April 2013.

Monetary policy in Singapore is formulated with the objective of promoting price stability as a basis for sustainable economic growth. Chart 3 traces the evolution of monetary policy, as indicated by movements in the S$NEER, against the backdrop of developments in growth and inflation. Since April 2010, MAS has adopted a modest and gradual appreciation path for the S$NEER policy band, which has had a restraining effect on the economy and prices. At the same time, the monetary policy stance has been calibrated to facilitate the ongoing economic restructuring aimed at raising productivity over the longer term. While MAS recognises that inflation could be temporarily higher, there is a need to guard against an entrenchment of inflationary pressures or build-up of inflation expectations during this period of transition.