What is the objective of monetary policy in Singapore?
The Monetary Authority of Singapore (MAS) is Singapore’s central bank. A primary function of MAS is therefore to conduct monetary policy, in addition to the other common roles of a central bank such as managing Official Foreign Reserves, issuing currency, overseeing payment systems and serving as a banker to and financial agent of the Government.
This section explains why price stability is the overriding objective of monetary policy in Singapore and spells out the criteria that MAS uses to assess price stability.
1.1 What is the objective of MAS’ monetary policy?
MAS is responsible for maintaining price stability conducive to sustained growth of the economy. This objective is enshrined in the MAS Act.
The MAS Act does not prescribe any other mandate for monetary policy, unlike some other central banks which may have a dual mandate to achieve both maximum employment and price stability.
1.2 What is price stability? How does MAS assess price stability in the Singapore economy?
Price stability describes a situation in which broad-based inflation—or average price increases in the economy—is contained, and is not a significant consideration for households and businesses when they make consumption and investment decisions.
MAS looks at a broad range of price and cost indicators in the economy to assess whether there is overall price stability. Two key measures of consumer price inflation that MAS pays close attention to are ‘MAS Core Inflation’ and ‘CPI-All Items inflation’.
In addition, MAS monitors developments in wages and rentals, import and export prices, output prices, and also measures of resource utilisation and indicators of inflation expectations as these contain information about future price dynamics.
Focusing on average price movements in the broader economy means that MAS does not seek to offset relative price changes, i.e. the change in the price of one good with respect to other prices. For example, if an increase in global oil prices causes the price of petrol to rise relative to the price of other goods and services in the economy, MAS does not necessarily tighten monetary policy to offset this shift. In fact, orderly relative price movements in the economy play a valuable signalling role in inducing optimal responses in consumption and production behaviour.
However, if the higher cost of petrol feeds into increased business costs and induces perceptions that future inflation will be higher, this will result in a generalised increase in prices. In this instance, MAS may tighten monetary policy to offset rising inflationary pressures.
1.3 What is core inflation in Singapore?
‘CPI-All Items inflation’ is the change in the overall Consumer Price Index (CPI) and measures the average price change in a fixed basket of consumption goods and services commonly purchased by households. ‘CPI-All Items inflation’ is also often referred to as ‘headline inflation’.
‘MAS Core Inflation’ is a measure of underlying consumer price inflation. It is based on a subset of the CPI basket that better captures the underlying trend in prices which can be addressed by MAS’ monetary policy. Core inflation is the measure that MAS monitors most closely, among the range of indicators.
In other countries, ‘core inflation’ strips out the prices of food and energy items as these tend to be volatile and susceptible to global commodity market fluctuations. In Singapore, these items are included in MAS Core Inflation because MAS’ monetary policy can directly influence the pass-through from global prices to domestic prices.
Instead, MAS Core Inflation strips out the costs of accommodation and private road transport. The bulk of accommodation cost is comprised of imputed rentals on owner-occupied accommodation. Imputed rentals are meant to reflect the costs to homeowners of utilising housing services. They do not reflect the cash outlays of the large majority of households who own their homes, nor necessarily influence the broader, underlying price dynamics in the economy. MAS Core Inflation therefore excludes the cost of accommodation. Meanwhile, private road transport costs are significantly influenced by the domestic policy framework for controlling road congestion.
1.4 Does MAS have an inflation target?
MAS does not have an explicit inflation target. Nevertheless, MAS has concluded that, on average, a core inflation rate of just under 2%, which is close to its historical mean, is consistent with overall price stability in the economy.
This differs from some other central banks which have specific inflation targets. For example, the Bank of England is required by the government to keep the rate of inflation of the UK’s consumer price index at 2%.
MAS also monitors a range of other price and cost measures so that it has a comprehensive view of inflationary pressures in the economy. This enables MAS to take the appropriate monetary policy actions to ensure medium-term price stability.
1.5 Why is price stability important?
A low and stable rate of inflation provides a conducive environment for sustained economic growth and improves the well-being of Singaporeans through several channels.
When inflation is low and stable, businesses are better able to plan and decide on investment and job creation. Conversely, a high rate of inflation tends to be associated with volatile price changes which creates uncertainty. In an environment of heightened uncertainty, businesses may hold back on their expansion and hiring plans.
During periods of high inflation, wages tend to increase rapidly as well, and run ahead of productivity gains. Businesses’ unit labour costs will rise at a rapid pace and result in further inflationary pressures and a wage-price spiral if firms pass on cost increases to consumers by raising prices.
High inflation can mean particular hardship for households whose incomes do not keep pace with rising prices, such as retirees. Keeping inflation low and stable therefore protects the purchasing power of the S$ and households’ savings.
However, deflation (negative inflation) is also damaging to an economy. When prices are persistently falling, firms may try to maintain profit margins by reducing costs. However, because costs such as wages cannot fall continuously, firms may reach a point where they are unable to cut costs further. Businesses that are making sustained losses may be forced to shut down and retrench their workers.
There is also the risk that if households hold back on their purchases in anticipation of price declines, a negative spiral could ensue where consumers reduce expenditure, companies shut down, unemployment rises, and spending falls further.
1.6 Has Singapore been successful in keeping inflation low and stable??
Singapore has succeeded in keeping inflation low since the adoption in the early 1980s of a monetary policy framework clearly aimed at achieving medium-term price stability, and implemented through the management of the exchange rate. (See Question 2.2)
CPI inflation has generally been below that of the advanced economies (Table 1) and has also been less volatile.
Table 1: Inflation in Singapore, the 7 Major OECD Economies, and the World
MAS Act 
Ong, Z Y D, Soo, C G, Choy, K M, and Ng, B E (2011), “A Review of the Core Inflation Measure for Singapore”, MAS Staff Paper, No. 51.
Singapore Department of Statistics (2015), “Rebasing of the Consumer Price Index (Base Year 2014=100)”, Information Paper Series.