20 May 1998...In recent letters, Straits Times readers have questioned why banks have kept interest rates up. Others have expressed unhappiness over the recent increases in certain bank charges. They have sought clarification from the authorities.

2   Unlike most central banks, MAS does not set or control interest rates. MAS' monetary policy is centred on the exchange rate. MAS manages the exchange rate of the Singapore dollar against a basket of currencies with the aim of maintaining price stability.

3   In an open economy like Singa-pore, funds flow into and out of the country freely. This makes it impossible for MAS to influence both interest rates and exchange rates simultaneously. Since MAS manages the exchange rate, our domestic interest rates are set by market forces. They are influenced by the level of interest rates abroad, and by market expectations of whether the Singa-pore dollar exchange rate will rise or fall. If MAS tries to force domestic interest rates down, it will cause an outflow of funds from Singa-pore, pushing down the Singapore dollar and increasing imported inflation.

4   Banks are free to set their own lending and borrowing rates within this environment. They make these commercial decisions indepen-dently based on their cost of funds and assessment of credit risk. There is no interest rate cartel among the banks in Singapore.

5   MAS also does not prescribe what banks should charge for their services. Each bank decides for itself how much or how little to charge. If it makes the wrong decision, it will either lose money on the business, or chase away customers to other banks. It is inappropriate for MAS to dictate or influence what are essentially commercial decisions, especially at a time when MAS is reducing administrative guidance and giving market forces more free play.

LEONG SING CHIONG
SENIOR PRESS OFFICER
MONETARY AUTHORITY OF SINGAPORE