How does MAS carry out monetary policy?

Frontal view of MAS Building

Central banks around the world are responsible for managing inflation, which is the rate at which the general price level in the economy changes. Central banks use “monetary policy” to manage inflation.  

MAS is Singapore’s central bank. The key objective of MAS’ monetary policy is to ensure medium-term price stability that is conducive to sustainable growth of the economy. This means consistently ensuring that inflation is low and stable over a time frame of more than a year. Households and businesses can plan for the longer term without worrying about prices rising too quickly, and there is a firm foundation for the economy to grow.

Most central banks today conduct monetary policy by changing domestic interest rates. In the past, many central banks also controlled the supply of money in the economy.

Since 1981, MAS has conducted monetary policy by managing the Singapore dollar exchange rate. MAS does not control domestic interest rates or money supply growth. Exchange rate policy is the only form of monetary policy in Singapore.

Let’s find out why monetary policy is so unique for Singapore.  

The exchange rate is more important for inflation in Singapore
Singapore is a small and very open economy, meaning it trades heavily with the rest of the world. The value of its exports and imports of goods and services in one year is more than three times the value of what is produced in the economy. In comparison, trade is only 56 percent of the average regional economy’s GDPWorld Bank data (2021). Based on the East Asia and Pacific grouping, comprising Cambodia, China, Indonesia, South Korea, Lao PDR, Malaysia, Mongolia, Myanmar, Pacific Islands, Papua New Guinea, Philippines, Singapore, Thailand, Timor-Leste and Vietnam. .

Singapore imports for most of its basic needs, such as food, energy and raw materials. Out of every dollar spent domestically, about 40 cents go to imports. At the same time, a lot of the goods and services produced in Singapore are exported to the world.

For such an open and small economy, the exchange rate has a greater influence over domestic inflation than interest rates. The exchange rate is used to convert prices of imports that are in foreign currencies to Singapore dollar prices, which are ultimately what consumers here pay.


Find out how the Singapore dollar exchange rate affects inflation.


Overview of MAS’ monetary policy framework:

A basket of currencies is more relevant for economy-wide prices
Singapore trades with many different countries, buying and selling goods and services priced in a variety of currencies. Therefore, how the Singapore dollar performs in relation to the various currencies collectively is what matters for general price levels in Singapore, and in turn, inflation. In contrast, the Singapore dollar’s exchange rate against any one particular currency, such as the Japanese Yen or Malaysian Ringgit, would be important only for the prices of items imported in those currencies.

The basket of bilateral exchange rates is combined into an index, which is also known as the Singapore dollar nominal effective exchange rate (S$NEER). This index is compiled by assigning weights to the currencies of Singapore’s major trading partners based on the importance of their trade relationships with us. It is also known as a trade-weighted exchange rate.
A policy band is used to guide the exchange rate
MAS does not directly set the precise level of the exchange rate or tightly control it in real time, unlike some countries that fix their exchange rates to another currency. Instead, MAS allows the S$NEER to move up and down within a policy band. The S$NEER can therefore appreciate or depreciate within the band in the short term when conditions in financial markets change or when shocks hit the Singapore economy.

MAS sets monetary policy by determining three parameters of the policy band. By adjusting any of these three levers, MAS can guide the S$NEER on a path that will help bring about low and stable inflation in the economy.



MAS can increase or reduce the rate of appreciation (slope) of the policy band to adjust how fast the S$NEER can appreciate over time.



MAS can strengthen or weaken the S$NEER immediately by shifting the level (mid-point) of the policy band.



MAS can adjust the width of the policy band to set the upper and lower bounds within which the S$NEER can move at any point in time.

In the next article, we will learn about how MAS’ adjustments to the exchange rate affect inflation in Singapore.

To review how MAS manages inflation, watch this video.


To find out more about the policy band for the exchange rate and how it is used, watch this video.