“If they had announced a more aggressive tightening today, expectations for April would have been dampened,” she said.
The Monetary Authority of Singapore (MAS), which controls monetary policy through currency rate adjustments, said that the pace of appreciation of its policy band would be slightly increased.
The Nominal Effective Exchange Rate, or S$NEER, will remain unaltered, as will the width of the band and the level at which it is centered.
The last time the MAS startled with an off-cycle move was in January 2015, when it loosened policy in response to a drop in global oil prices.
Many Asia-Pacific economies generally ignored inflationary dangers that alarmed policymakers in Europe and the United States last year, but that attitude appears to be changing now.
In the December quarter, Australia’s core inflation hit its highest annual rate since 2014, according to data released on Tuesday, casting doubt on the central bank’s dovish interest rate stance.
Policymakers in Japan, a country known for its chronically low inflation, have acknowledged the emergence of inflationary pressures.
Singapore’s policy shift comes just a day after data revealed that core inflation in the city-state rose at its sharpest rate in nearly eight years in December.
The MAS added, “This step builds on the pre-emptive change to an appreciating stance in October 2021 and is appropriate for achieving medium-term price stability.”
At a scheduled semi-annual policy meeting in April, the central bank will reassess its stance, with economists expecting it to tighten once more.
The Singapore dollar rose against the US dollar to 1.3425, its highest level since October 2021.
Singapore’s bellwether economy is predicted to grow at a rate of 3-5 percent this year, which is unchanged from previous projections.
“2022 will be a year of double tightening for Singapore,” according to OCBC’s Ling. “Both fiscal and monetary levers will grind tighter.”
As COVID-19 limitations are removed, the MAS expects Singapore’s economic recovery, which has so far been dominated by the trade-related and services sectors, to spread to the domestic-oriented and travel-related sectors this year.
COVID-19 vaccinations have been given to 88 percent of Singapore’s 5.5 million individuals, with 55 percent receiving booster injections.
Core inflation is predicted to be 2.0-3.0 percent this year, up from 1.0-2.0 percent in October, according to the MAS. Headline inflation is predicted to reach 2.5-3.5 percent, up from 1.5-2.5 percent previously forecast.
“While core inflation is likely to decline from strong levels in the first half of the year as supply constraints ease, the risks remain skewed to the upside,” the MAS stated.
Singapore’s annual budget will be released on February 18, and the government is likely to reveal the timing of a planned increase in the goods and services tax.
The economy of the city-state increased at its best rate in over a decade in 2021, rebounding from a record 5.4 percent drop in 2020. Over the previous two years, the government has spent more than S$100 billion to protect the economy from the pandemic’s effects.
Instead of using interest rates, the MAS controls policy by allowing the local currency to increase or fall within an unspecified band versus the currencies of its primary trading partners.
It alters its policy using three levers: the policy band’s slope, mid-point, and width.
What is Singapore’s monetary policy like?
Because Singapore is an open economy that relies significantly on trade, the MAS utilizes the exchange rate as its primary policy instrument, unlike most central banks that employ the interest rate to control monetary policy.
This is the S$NEER, or Singapore dollar exchange rate, which is controlled against a trade-weighted basket of currencies from Singapore’s major trading partners.
The S$NEER is free to move around in an undefined band. The MAS intervenes if it falls out of this band by buying or selling Singapore dollars.
When the central bank intends to adjust the rate of appreciation or depreciation of the local currency depending on estimated threats to Singapore’s GDP and inflation, it changes the slope, width, and mid-point of this band.
The MAS effectively allowed the Sing dollar to strengthen on Tuesday by raising the slope of its policy band, making imports cheaper and exports more expensive.
What causes inflation in Singapore?
SINGAPORE: After achieving multi-year highs on the strength of a strong economy, inflation is swiftly emerging as a key concern this year “External and local causes have combined to create a “perfect storm.”
According to the most recent official figures, Singapore’s headline or total inflation for December increased to 4% from 3.8 percent in November, a near nine-year high.
On a year-over-year basis, core inflation, which includes accommodation and private transportation, increased to 2.1 percent from 1.6 percent the previous month. According to Reuters, this was the indicator’s highest value since July 2014.
After a brief period of negative inflation in 2020 due to falling demand during the COVID-19 epidemic, cost pressures have risen quickly.
The Monetary Authority of Singapore (MAS) made a surprise inter-meeting policy decision last week in response to rising inflation.
The central bank, which usually meets in April and October, announced on January 25 that it will meet in March “increase the nominal effective exchange rate policy band for the Singapore dollar by a little amount”
This effectively permits the Singapore currency to gain, lowering import prices and so protecting Singapore consumers’ and enterprises’ purchasing power.
The MAS said its new action “builds on the pre-emptive shift to an appreciating stance” it made last October, when it startled markets by boosting the slope of its policy range, and is “suitable for ensuring medium-term price stability.”
What are the methods for reducing inflation?
With a growing understanding that long-term price stability should be the priority,
Many countries have made active attempts to reduce and eliminate debt as an aim of monetary policy.
keep inflation under control What techniques did they employ to do this?
Central banks have employed four primary tactics to regulate and reduce inflation.
inflation:
For want of a better term, inflation reduction without a stated nominal anchor.
‘Just do it’ is probably the best way to describe it.
We’ll go over each of these tactics one by one and examine the benefits.
In order to provide a critical review, consider the merits and downsides of each.
Exchange-rate pegging
A common strategy for a government to minimize and maintain low inflation is to employ monetary policy.
fix its currency’s value to that of a major, low-inflation country. In
In some circumstances, this method entails fixing the exchange rate at a specific level.
so that its inflation rate eventually converges with that of the other country
In some circumstances, it entails a crawling peg to that of the other country, while in others, it entails a crawling peg to that of the other country.
or a goal where its currency is allowed to decline at a consistent rate in order to achieve
meaning it may have a greater inflation rate than the other countries
Advantages
One of the most important benefits of an exchange-rate peg is that it provides a notional anchor.
can be used to avoid the problem of temporal inconsistency. As previously stated, there is a time inconsistency.
The issue arises because a policymaker (or influential politicians)
policymakers) have a motive to implement expansionary policies in order to achieve their goals.
to boost economic growth and employment in the short term If policy may be improved,
If policymakers are restricted by a rule that precludes them from playing this game,
The problem of temporal inconsistency can be eliminated. This is exactly what an exchange rate is for.
If the devotion to it is great enough, peg can do it. With a great dedication,
The exchange-rate peg entails an automatic monetary-policy mechanism that mandates the currency to follow a set of rules.
When there is a tendency for the native currency to depreciate, monetary policy is tightened.
when there is a propensity for the home currency to depreciate, or a loosening of policy when there is a tendency for the domestic currency to depreciate
to appreciate in value of money The central bank no longer has the power of discretion that it once did.
can lead to the adoption of expansionary policies in order to achieve output gains.
This causes time discrepancy.
Another significant benefit of an exchange-rate peg is its clarity and simplicity.
A’sound currency’ is one that is easily comprehended by the general population.
is an easy-to-understand monetary policy rallying cry. For instance, the
The ‘franc fort’ has been invoked by the Banque de France on numerous occasions.
in order to justify monetary policy restraint Furthermore, an exchange-rate peg can be beneficial.
anchor price inflation for globally traded items and, if the exchange rate falls, anchor price inflation for domestically traded goods.
Allow the pegging country to inherit the credibility of the low-inflation peg.
monetary policy of a country As a result, an exchange-rate peg can assist in lowering costs.
Expectations of inflation quickly match those of the target country.
How can increasing inflation be brought under control?
- Governments can fight inflation by imposing wage and price limits, but this can lead to a recession and job losses.
- Governments can also use a contractionary monetary policy to combat inflation by limiting the money supply in an economy by raising interest rates and lowering bond prices.
- Another measure used by governments to limit inflation is reserve requirements, which are the amounts of money banks are legally required to have on hand to cover withdrawals.
Is the exchange rate in Singapore fixed or floating?
Singapore has had an exchange rate-centered monetary policy framework since 1981, reflecting the modest open character of its economy. Singapore’s currency rate regime is an intermediate one based on the basket-band-crawl system. For the past three decades, the MAS has effectively discouraged speculators from assaulting the native currency with its managed float regime. Simultaneously, the managed float system’s flexibility enabled Singapore to emerge largely unhurt from the Asian crisis of 19971998. To gain a better understanding of Singapore’s exchange rate policy, we look at three aspects of its implementation: I using the exchange rate as the primary monetary policy instrument rather than the interest rate; (ii) managing the currency basket in terms of foreign exchange intervention operations; and (iii) regulating the level of domestic liquidity alongside exchange rate policy. This paper also discusses some of the issues that policymakers may face when they implement Singapore’s currency rate strategy.
Why does Singapore accept interest rates?
The Bank of England used so-called “quantitative easing” in 2009, pouring more than 200 billion into the economy. Within the UK economy, record low interest rates have also been maintained. The United States has likewise adopted quantitative easing and low interest rates.
(a) Explain why exchange rates, rather than interest rates, are preferred as a monetary policy instrument in Singapore.
(b) Discuss the potential impact of quantitative easing and low interest rates in the United States and the United Kingdom on the Singapore economy.
Answer
(a) There are two aspects to the question: why Singapore does not utilize interest rate-based monetary policy and why it does use exchange rate-based monetary policy.
Students should explain how interest rate-centered monetary policy works and why it is not applied in Singapore in the first half of the question.
The central bank can expand the money supply by performing an open market purchase to boost economic growth or reduce unemployment. The number of reserves in the banking system will increase as the money supply expands. Interbank rates will decline as a result, and the level of interest rates in the economy will reduce as well. To stimulate the struggling US economy, the Federal Reserve expanded the money supply to cut the federal funds rate from 5.25 percent in October 2007 to 0-0.25 percent in December 2008. Lower interest rates will reduce the incentive to save and lower borrowing costs, resulting in an increase in consumer spending. Furthermore, lower borrowing rates will lead to more profitable planned investments, which will result in an increase in investment spending. An increase in consumption and investment spending will raise aggregate demand, which will encourage enterprises to expand production, resulting in a rise in national output. When companies boost output, they will consume more household factor inputs and hence pay them more factor income, resulting in a rise in national income. Firms will increase production when aggregate demand rises, resulting in an increase in national output. When companies boost output, they will consume more household factor inputs and hence pay them more factor income, resulting in a rise in national income. An increase in national output will result in a boost in labor demand in the economy, which will result in a decrease in unemployment.
Singapore does not use monetary policy for four reasons: the choice of a managed float exchange rate, the role of an interest rate-taker, the low interest elasticity of consumption and investment relative to domestic exports, and the small consumption and investment expenditure on domestic goods and services relative to domestic exports. Due to the time constraints of the examination, students are not required to explain all four reasons why Singapore does not employ interest rate-based monetary policy. Instead, they only need to describe one of the two reasons, one of which should be the role of an interest rate-taker because it is the most essential reason why Singapore does not use interest rate-based monetary policy. It is, nonetheless, best practice to provide all four reasons.
Singapore, as a small and open economy, is an interest rate taker in the sense that it cannot manipulate interest rates by changing the money supply. If the MAS increases the money supply to lower interest rates, hot money inflows will fall and hot money outflows would rise, resulting in a reduction in the money supply. Because Singapore’s economy is small and open, changes in hot money flows will have a significant impact on the money supply. As a result, the reduction in the money supply will result in a return to the initial level of interest rates. Monetary policy is not employed in Singapore due to the low interest elasticity of consumption and investment, in addition to the inability to manage interest rates. In Singapore, consumption and investment are inelastic. Due to the culture of thrift in Singapore, a change in interest rates is unlikely to result in a substantial change in consumption, and it is also unlikely to result in a big change in investment, as the majority of investments are undertaken by international enterprises with foreign sources of funding.
Students should explain why it is vital for Singapore to manage the exchange rate and how exchange rate-centered monetary policy is employed to achieve this goal in the second section of the question. Instead of explaining exchange rate policy, students should explain exchange rate-centered monetary policy. This is not to suggest that Singapore does not use exchange rate policy. Rather, because this is what the inquiry is asking, an explanation of the use of exchange rate-centered monetary policy is more relevant.
Because domestic exports make up such a major amount of total demand, a dramatic drop in the exchange rate that results in a large increase in exports is likely to cause high demand-pull inflation. Singapore also has a large amount of imports. As a result, a sudden increase in the exchange rate, which leads to a large increase in import prices in domestic currency, is likely to result in high imported inflation.
Although Singapore does not utilize interest rate-based monetary policy, it does use monetary policy to provide adequate liquidity in the banking system to meet banks’ demand for reserves. This is known as exchange rate-centred monetary policy, and it aims to keep the Singapore dollar’s exchange rate within the policy band. When the Singapore government deposits its budget surplus or the CPF board deposits its net proceeds with the MAS, for example, the money supply in Singapore falls, causing interbank rates to rise, causing interest rates to climb across the economy. Higher interest rates in Singapore will result in an increase in hot money inflows and a decrease in hot money outflows, causing the Singapore dollar’s exchange rate to climb above the policy band. The MAS will boost and thereby restore the money supply in order to keep the Singapore dollar’s exchange rate within the policy band.
Conclusion
Because there are no evaluation marks, the conclusion can simply be a summary or recommendation.
(b) The TAS technique should be used to answer the question. Students should discuss the favorable effects of lower interest rates in the United States and the United Kingdom on the Singapore economy in their thesis. They should discuss the negative repercussions in the antithesis.
Consumption expenditure will rise as interest rates in the United States and the United Kingdom fall. When this occurs, imports in the United States and the United Kingdom will rise, resulting in an increase in exports in Singapore. As a result, Singapore’s current account will improve, resulting in an improvement in the balance of payments. When interest rates in the United States and the United Kingdom fall, investment spending rises. When this occurs, outward FDI from the United States and the United Kingdom will increase, resulting in an increase in inward FDI to Singapore. As a result, Singapore’s capital and financial accounts will improve, resulting in an improvement in the balance of payments.
Singapore’s increased exports and investment spending will raise aggregate demand, resulting in an increase in national output and, as a result, national income.
When exports and investment expenditure rise, resulting in an increase in aggregate demand, companies will utilise more factor inputs from households to expand production, resulting in higher factor income for households. Households will raise their consumption expenditure as their income rises. Firms will use even more factor inputs from households to enhance output as a result of the growth in consumption expenditure and hence aggregate demand, and thus will pay households even more factor income. When this happens, household income will climb even more, causing them to boost their consumption expenditure even more. As a result, the initial increase in aggregate demand resulting from increased exports and investment expenditure will lead to increased consumption expenditure and thus further increases in aggregate demand, resulting in a larger increase in national output and thus national income, which is known as the multiplier effect.
Because of the increase in aggregate demand in Singapore, national output will rise, leading in a rise in labor demand and a decrease in unemployment.
When interest rates in the United States and the United Kingdom fall, interest rates in Singapore will rise. When this occurs, Singapore will see an increase in hot money inflows and a decrease in hot money outflows, causing demand for Singapore dollars to rise and supply to fall, resulting in an increase in the exchange rate. When the Singapore dollar advances, the price of imported intermediate products in Singapore’s domestic currency falls, lowering the cost of production. When this occurs, aggregate supply in Singapore will increase, leading in an increase in national output and, as a result, national income, and a decrease in unemployment. Assuming that aggregate demand is increasing, which is the normal state of the economy, an increase in aggregate supply will result in a surplus of goods and services, resulting in a slower rise in the general price level and thus lower inflation, and if this makes Singapore’s goods and services relatively cheaper than foreign goods and services, net exports will increase, improving the current account and thus the balance of payments. An appreciation of the Singapore dollar will result in a smaller increase in the prices of imported consumer goods in domestic currency, resulting in a smaller rise in the general price level, resulting in lower direct imported inflation, in addition to lower indirect imported inflation or imported cost-push inflation.
Increased investment expenditure in Singapore will result in a faster rise in production capacity and, as a result, aggregate supply in the long run, leading in better economic growth, lower unemployment, and improved balance of payments.
Singapore’s goods and services will be relatively more expensive than international goods and services if the exchange rate rises. If this happens, Singapore’s net exports will fall, worsening the current account and hence the balance of payments, providing the sum of demand and supply price elasticities is larger than one. In addition, the cost of foreign currency investments in Singapore will rise. When this occurs, FDI into Singapore would decline, negatively impacting the capital and financial accounts, as well as the balance of payments.
A decrease in net exports and investment expenditure in Singapore will result in a decrease in aggregate demand, which will result in a decrease in national output and hence national income, as well as an increase in unemployment and a decrease in the general price level, leading in deflation. Students should discuss why deflation is bad for the economy.
In the long run, a reduction in Singapore’s investment expenditure will result in a slower expansion in production capacity and thus aggregate supply. When this happens, Singapore’s economic development will slow, leading to higher unemployment and higher inflation, potentially worsening the country’s balance of payments.
Evaluation
Quantitative easing and low interest rates in the United States and the United Kingdom have had an uncertain impact on the Singapore economy.
Reason 1: If consumer and business sentiment are deteriorating, a drop in interest rates in the US and the UK may not result in an increase in consumption and investment spending.
Reason 2: The exchange rate in Singapore may not rise because it is close to the policy band’s top limit.
Is there inflation in Singapore?
SINGAPORE: Singapore’s core inflation increased to 2.1 percent in December, up from 1.6 percent in November, according to government figures issued on Monday (Jan 24).
According to a joint media release from the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI), this was driven by an increase in services inflation, primarily due to a steeper increase in airfares, which reflected the higher costs of travel on vaccinated travel lanes (VTL).
In December, the headline consumer price index, or total inflation, increased to 4% year on year, up from 3.8 percent the previous month.
What will be Singapore’s inflation rate in 2021?
You know inflation has arrived on our little red dot when your $2 chicken rice has become an urban legend and the price of your $2.50 plate has risen to $3. While our grandparents (or even parents) frequently moan about how costly goods have become in Singapore, their comments this year ring true.
Singapore’s headline inflation rate, or Consumer Price Index (CPI)-All Items Inflation, rose to 2.3 percent in 2021 from -0.2 percent in 2020, while MAS Core Inflation rose to 0.9 percent in 2021 from -0.2 percent in 2020. The Consumer Price Index (CPI) – All Items in Singapore covers all categories, however the MAS Core Inflation Measure excludes two major spending categories: “Accommodation,” which is a subset of Housing & Utilities, and “Private Road Transportation,” which is a subset of Transportation.
Instead of generalizing about how expensive things are, let’s look at the precise Consumer Price Index for 2021, provided by the Singapore Department of Statistics, to see what ordinary items and services have become more expensive.
Also see: Singapore Inflation Rate in 2020: How Much Have Prices Increased For Everyday Goods And Services?
The Consumer Price Index Is A Reflection Of Everyday Prices
The Consumer Price Index (CPI) is a weighted measure of average price changes over time for a defined basket of goods and services typically purchased by resident households. Singapore’s CPI data dates back to the 1960s, albeit the category information is not as detailed as it is today. The CPI must be revised to reflect changes in the weighting and types of goods and services as household consumption patterns vary over time. This rebasing was completed most recently in 2019.
While the order of the categories kept the same (housing & utilities, food, and transportation remained the top three), the weightings for each category changed. Food, housing & utilities, and clothing & footwear had lower weights, whereas transportation, communication, education, health care, and household durables had higher weights.
The inflation rate in 2021 was not a consistent 2.3 percent. Clothing & Footwear, Communications, and Miscellaneous Goods & Services all became less expensive, while the rest of the categories increased in price.
#1 Housing & Utilities (Increased 1.4% From 2020)
Most households’ greatest expense category is housing, which accounts for 24.8 percent of the CPI’s weightage. In 2021, the housing market saw record-breaking prices for both HDB resale apartments and private property, but the cost of living has thankfully not increased at the same rate. In 2021, the cost of accommodation climbed by 1.4 percent, while the cost of utilities increased by 1%.
This is most likely owing to Singaporeans’ high rate of property ownership. The cost of our homes would not be directly affected by rising housing prices for most households who are not moving or buying a new home. In fact, because interest rates are expected to continue low in 2021, consumers repaying mortgages may find it cheaper to make payments if they refinance their loans.
#2 Food (Increased 1.4% From 2020)
For most households, food is the second most expensive category (21.1 percent). You were correct if you assumed that food will grow more costly in 2021. Overall, the cost of food (including food and food service) has grown by 1.4 percent.
This rise in food prices is not only local in Singapore, but global as well. According to the Food and Agriculture Organization of the United Nations, global food prices climbed by 28% in 2021. (FAO). Harvest failures, rising demand, and higher crop input costs were all blamed.
Food prices in Singapore have risen by 1.6 percent (excluding food serving services). All food categories increased, with vegetables showing the largest increase of 5.2 percent, followed by fruits with a 2.7 percent increase, and meat with a 0.3 percent increase.
Restaurant, fast food, hawker, and catered food services all grew by 1.4 percent. Fast food had the largest rise among these services, at 1.6 percent, followed by hawker food at 1.5 percent.
What is the inflation rate in Singapore in 2022?
Inflation is expected to average 2.8 percent in 2022, according to the FocusEconomics Consensus Projection panel, up 0.5 percentage points from the previous month’s forecast. Inflation is expected to average 1.8 percent in 2023, according to our panel.
What are the three factors that produce inflation?
Demand-pull inflation, cost-push inflation, and built-in inflation are the three basic sources of inflation. Demand-pull inflation occurs when there are insufficient items or services to meet demand, leading prices to rise.
On the other side, cost-push inflation happens when the cost of producing goods and services rises, causing businesses to raise their prices.
Finally, workers want greater pay to keep up with increased living costs, which leads to built-in inflation, often known as a “wage-price spiral.” As a result, businesses raise their prices to cover rising wage expenses, resulting in a self-reinforcing cycle of wage and price increases.