How does MAS carry out its monetary policy?
Monetary policy in Singapore is carried out in three stages.
The first stage is the formulation of monetary policy by the Economic Policy Group (EPG) at MAS.
In the second stage, the proposed monetary policy stance is submitted to the Monetary and Investment Policy Meeting (MIPM) for their approval and a decision is made.
Finally, the chosen policy is communicated to the public by a Monetary Policy Statement (MPS) and implemented by the Monetary and Domestic Markets Management Department (MDD).
4.1 How does the Economic Policy Group at MAS formulate monetary policy in practice?
MAS’ monetary policy stance is announced to the public every six months, in April and in October.
Prior to that, the Economic Policy Group (EPG) of MAS assesses the latest information on the domestic and external economies and prepares its baseline projections for a range of real and nominal economic variables.
EPG ensures that these forecasts are internally consistent and robust. In addition to analyses of macroeconomic data, EPG also obtains feedback from private and public sector sources about the prospects for Singapore’s growth and inflation.
EPG’s assessment of whether the economic outlook has materially shifted compared to the previous monetary policy review forms the basis for thinking about the different possible policy paths for the Singapore Dollar Nominal Effective Exchange Rate (S$NEER).
The implications of a chosen policy stance are simulated using MAS’ suite of macroeconometric models to produce projections of the key variables relevant to monetary policy, such as core inflation, headline inflation, real GDP and the unemployment rate.
These ‘baseline’ model simulations serve to indicate the most appropriate policy that keeps inflation low and stable in the near and medium term. Alternative simulations may also be undertaken to test the robustness of the monetary policy stance to various risk scenarios and to assess trade-offs across the policy horizon.
4.2 What is the process by which monetary policy decisions are made?
The Economic Policy Group (EPG) prepares a monetary policy review report, which comprises of an in-depth assessment of recent economic developments, projections of inflation and economic growth over the medium term, policy options, and a recommendation for the monetary policy stance. The report is finalised after a discussion with the Managing Director of MAS and the Deputy Managing Director overseeing monetary policy. It is then presented to the Monetary and Investment Policy Meeting (MIPM), a committee of the Board of Directors of the MAS.
MIPM decides on the monetary policy stance that MAS should adopt, after a discussion of the trade-offs and considerations around various policy options under different scenarios presented in EPG’s report.
EPG drafts the Monetary Policy Statement (MPS) that announces the policy decision and its economic rationale, which MIPM approves after further discussion and inputs. The MPS is released on the MAS website on a pre-announced date in April and October at 0800 hours.
4.3 How is MAS’ monetary policy stance communicated?
MAS’ monetary policy stance is currently communicated to the public via three channels.
The first and main channel is the twice-yearly Monetary Policy Statement, released in April and October.
The second channel is the biannual Macroeconomic Review that MAS releases about two weeks after the Monetary Policy Statement. It provides a detailed elaboration of MAS’ rationale for the monetary policy decision as well as the associated economic analysis.
Third, MAS also carries out closed-door briefings for the Singapore media and private sector analysts when it releases the Macroeconomic Review.
4.4 How is MAS’ monetary policy implemented?
The Monetary and Domestic Markets Management Department (MDD) of MAS is responsible for monetary policy implementation. This means ensuring that the Singapore Dollar Nominal Effective Exchange Rate (S$NEER)—which is MAS’ intermediate target of monetary policy—is kept within the boundaries of the policy band.
MDD’s primary tool for managing the S$NEER is intervention operations in the spot foreign exchange (FX) market.
MDD conducts FX intervention operations involving the sale or purchase of US$ against the S$ to ensure that the S$NEER is kept within the policy band, and is consistent with domestic price stability. S$-US$ intervention is the preferred operation since this is by far the most liquid S$ currency pair traded.
In the process of monetary policy implementation, MAS accumulates or expends Official Foreign Reserves (OFR) leading to changes in the size of MAS’ balance sheet.
MAS’ intervention operations are thus akin to interest rate-targeting central banks’ monetary policy operations. Instead of using money market operations to achieve a targeted policy rate, MDD uses FX intervention operations to ensure that the S$NEER stays within the policy band.
Under both exchange rate and interest rate regimes, monetary policy operations lead to changes in the central bank’s balance sheet. For example, the selling of US$ to strengthen the S$NEER will have the effect of reducing OFR on the asset side of MAS’ balance sheet, which is matched by a reduction in banks’ cash balances with the MAS on the liabilities side. This is akin to a central bank that targets a higher interest rate by selling domestic currency-denominated securities and thereby reducing the asset side of its balance sheet, matched by a reduction in banks’ cash balances with the central bank on the liabilities side.
In practice, MDD generally does not need to conduct significant intervention operations to implement the monetary policy stance after the policy announcement.
This reflects MAS’ credibility in formulating monetary policy that is congruent with the prevailing outlook for the economy and the objective of maintaining medium-term price stability. The rationale for the policy decision is also communicated clearly through the Monetary Policy Statement and the accompanying Macroeconomic Review.
4.5 What are the key principles that guide MAS’ foreign exchange intervention operations? What explains the size of MAS' FX interventions?
MAS’ monetary policy settings, as defined by the slope, width and mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, are calibrated to be consistent with medium-term price stability.
Typically, when forces acting on the S$NEER are orderly and largely self-equilibrating, MDD allows the market to determine the level of the S$NEER within the policy band.
Chart 4.1, which plots the year-on-year change in the S$NEER against MAS Core Inflation, shows that the S$NEER has generally fluctuated in line with underlying economic conditions.
Chart 4.1: Change in S$NEER and MAS Core Inflation (Q1 1991–Q2 2018)
This tight relationship has been due to both the appropriateness of MAS’ monetary policy stance as well as the implementation of monetary policy through FX intervention operations.
FX intervention operations are necessary to lean against exchange market pressure which may drive the S$NEER away from a level consistent with domestic price stability. For example, net issuance of Singapore Government Securities results in an overall drain of S$ liquidity from domestic money markets that, all else equal, causes the S$ to appreciate. At the same time, as the S$ is internationally traded and freely useable globally, the S$ is frequently subjected to significant gross capital flows, driven by external factors such as global liquidity and risk aversion. The S$ also serves as a proxy for the region, given Singapore’s strong economic linkages with Asia and its open capital account. These factors cause exchange rate pressures that are often unrelated to Singapore’s underlying inflation, and may necessitate sizeable FX intervention operations to ensure that the S$NEER is in line with domestic economic conditions.
The size of MAS’ FX intervention operations needs to be seen in light of S$ FX turnover. Based on the 2019 BIS Triennial Central Bank Survey of FX markets, about US$37 billion of S$ FX spot transactions are carried out daily, ranking just behind the G10 currencies, Chinese Renminbi, Hong Kong Dollar and Mexican Peso. Relative to the size of the economy, total S$ FX turnover is the third highest in the world, after the New Zealand Dollar and the Swiss Franc.
Chart 4.2 plots a standardised measure of MAS intervention operations against gross private equity portfolio inflows as a percentage of nominal GDP. It shows that MDD’s intervention operations “lean against the wind” and thereby help ensure that the S$NEER is in line with underlying economic conditions. MDD sells S$ and buys US$ when there is a surge in capital inflows, moderating the excessive appreciation pressure, and buys S$ and sells US$ when foreign capital flows out, tempering the undue weakening of the exchange rate.
Chart 4.2: FX Intervention Operations scaled by S$ FX Turnover (Standardised) and Gross Private Equity Portfolio Inflows (Q1 1995–Q2 2018)
In late 2006 and 2007, for example, Singapore experienced a sharp increase in gross capital inflows or a ‘surge’ episode. This was followed by a sharp capital outflow or ‘stop’ episode during the peak of the Global Financial Crisis in 2008–09.
MDD undertook intervention operations to lean against the wind during this entire period, even as the S$NEER was allowed to appreciate over 2006–07 when inflation was rising, and then ease when inflation fell in 2009.
4.6 Does MAS disclose the parameters of the monetary policy framework?
MAS does not disclose the currencies in the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) basket or their weights. However, MAS releases weekly indexed data on the S$NEER.
MAS currently does not disclose the conjunctural parameters of the policy stance, which are the slope and width of the S$NEER policy band, and the specific level at which the band is centred. However, when MAS changes the monetary policy stance, it provides qualitative descriptions of the adjustment to the policy parameters (e.g. a ‘slight’ increase in the slope).
Forbes, K J and Warnock, F E (2011), “Capital Flow Waves”, Macroeconomic Review, Special Feature B, Vol. X Issue 2, October.
MAS (2014a), The Monetary Model of Singapore (MMS): A Technical Overview
MAS (2014b), The Satellite Model of Singapore (SMS): A Technical Overview