How MAS conducts its financial plan in Singapore? Central banking institutions round the world use financial plan to gear the local economy into a certain direction. Monetary policy helps a country to combat inflationary pressures and also increase growth throughout the market. Monetary policy is defined as the action of a central bank therefore, that determines the rate and growth of the money supply which in turn affects the interest rates. Many countries in the world, including United China and States, adopt mortgage loan policy where central banks increase or decrease rates of interest or change the quantity of minimum bank reserve requirement rate.
However, in the entire case of Singapore, its financial plan position differs from that of other major economies around the world. Before we discuss on the recent direction of monetary policy in Singapore, let’s look at how Singapore manages its monetary policy to get a better understanding. In simple terms, Singapore adopts an exchange rate policy rather than an interest rate policy.
This has been the case since 1981. The mainly objective of the policy is to maintain price stability and sustainable financial growth. Firstly, the value of SGD has to be measured against something. Instead of using one single money as a standard like what Hong Kong is doing, a basket is used by the MAS of currencies of our major trading partners. It is trade weighted such that the currencies of our larger trading partners’ bears more excess weight and constitute a more integral part of the index.
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This is examined regularly and the weight may be transformed as out trade pattern changes. This implies the SGD is assessed against a container of currencies and not one single money. Secondly, unlike most countries which adopt a float or fixed exchange rate regime either, Singapore’s plan is a crossbreed of both. NEER is the Singapore Dollar Nominal Effective Exchange Rate which consists of a container of currencies as discussed earlier. Yr in Apr and Oct Every, the Monetary Authority of Singapore will to push out a statement on the current economic craze in Singapore and the path of its monetary policy.
This is released on a bi-monthly basis. Inside the band, daily fluctuations just like any other currency the SGD is put through. Businesses from overseas can buy or sell SGD to pay local companies for goods required. Institutions can buy or sell the money to hedge against future actions. Speculators and traders can trade it in the Forex market openly. This freedom is essential for an open economy like ours to flourish.
The band prevents the currency from becoming too strong, making exports more expensive to foreign countries or weakened too, that will lead to reducing purchasing power in the domestic country. The width of the music group establishes how much motion or volatility the SGD can manoeuvre in. By narrowing the band, the SGD will have less room to manoeuvre before MAS intervenes.
The slope of the band gives a sign of how aggressive the MAS want its policy to be over another six months. By increasing the slope of the band, SGD can appreciate at a faster speed. How come Singapore different? Singapore is a little and open economy. If the currency freely were to float, MAS wouldn’t normally have the flexibility to cope with shocks and thus unable to keep up with the purchasing power of the SGD. A floating system would cause the SGD to be too volatile in the brief run resulting in undesirable consequences. If we’ve a set currency regime, the SGD will be pegged to a single foreign currency.