Parliamentary Replies
Published Date: 26 May 2008

Reply to PQ on Singapore's Monetary Policy

Question Nos. 609 and 610
Notice Paper No. 100 and 105 of 2008
For Oral Answer

For Parliament Sitting on 26 May 2008

Name and Constituency of  Member of Parliament
Mdm Ho Geok Choo, MP for West Coast GRC


To ask the Senior Minister how has the strong Singapore dollar helped the average Singaporean to keep high inflation at bay.

To ask the Senior Minister what is the key to Singapore’s success in maintaining a strong Singapore dollar policy and how it has contributed to keeping Singapore competitive.

Mr Lim Hng Kiang, Minister for Trade and Industry and Deputy Chairman:

1. Singapore adopts an exchange rate-centred monetary policy to maintain price stability for sustained economic growth.  Given the small and open nature of our economy and our dependence on trade, the exchange rate has an important impact on domestic prices.  This regime, in place since 1981, has served us well.  For example, domestic inflation has been low over a sustained period, averaging 1.7% in 1981-2007, compared with an average of 5.5% for the OECD countries. 
2. The objective of our monetary policy has always been and will continue to be focused on maintaining price stability over the medium term.  An environment of low and stable inflation helps preserve the purchasing power of Singaporeans’ income and savings.  It also provides a stable and conducive environment for businesses to undertake long-term investments, thus enhancing competitiveness and job creation, and providing the basis for sustained economic growth.  In turn, the success of our economic growth strategy, which leverages on global and financial market integration, has supported the continued appreciation of the domestic currency consistent with the economy’s strengthening economic fundamentals.  These include prudent fiscal policy and a large reserve position, flexible product and factor markets, as well as a robust and sound financial system and domestic corporate sector.  

3. Since 2004, MAS has adopted a policy of targeting a modest and gradual appreciation of Singapore’s trade-weighted exchange rate, amidst robust economic growth in the economy.  In its last two policy announcements in October 2007 and April 2008, MAS said that it would allow a stronger appreciation of the Singapore dollar, through a steeper slope and an upward re-centring of its policy band, respectively.  This was a considered and measured response to counter the inflationary pressures that were building up, while providing support for sustainable economic growth.  In the current environment of high global inflation, MAS’ exchange rate policy of a strong Singapore dollar has helped to reduce the cost of our imports.  For example, between January 2007 and March 2008, global food prices – measured by the IMF food price index – surged 50% whereas the domestic cost of food imports rose by a much lower 14%. 

4. While MAS’ exchange rate policy stance has helped to dampen the effects of global food and oil inflation, we cannot insulate ourselves completely from the effects of higher world prices passing through to the Singapore economy.  MAS has to strike the right balance in the setting of its exchange rate policy taking into account both inflation and growth considerations, mindful in particular that external demand conditions have weakened especially in the G3 markets.   
5. The government has therefore adopted a multi-pronged strategy to cope with inflation, which was announced as early as February this year in the Budget speech.  Besides monetary policy, some of the other measures include the diversification of food sources to minimise spikes in prices due to supply disruptions from any one country, as well as raising public awareness of cheaper food choices and substitutes.  At the same time, the government is providing direct assistance to Singaporeans who are adversely affected by the higher cost of living.  In addition to the GST Offset Package introduced in last year’s Budget, the government has also announced other relief measures this year, such as Growth Dividends and personal income tax rebates, targeted especially at lower- and middle-income Singaporeans.  Together, these schemes would help defray a large part of the increase in cost of living that households would experience this year.