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Singapore makes unexpected move to tighten monetary policy: Why and what could happen next?


The_King
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SINGAPORE: In what economists described as a “hawkish” surprise, the Monetary Authority of Singapore (MAS) unexpectedly tightened monetary policy at its half-yearly review on Thursday (Oct 14).

The move bucked market consensus. Most watchers had expected the central bank to only start policy normalisation in April next year, given global concerns about economic recovery amid the spread of the more contagious Delta variant.

It is the MAS' first policy tightening since 2018, putting an end to the zero-slope stance first adopted in March last year when the Singapore economy started feeling the effects of the COVID-19 pandemic.

In its policy statement, the central bank said the economy remains on track to grow between 6 and 7 per cent this year.

It also flagged the possibility of higher inflation amid “accumulating” external and domestic cost pressures.

The decision to tighten monetary policy will hence “ensure price stability over the medium term while recognising the risks to the economic recovery”, it added.

ABOUT THE POLICY DECISION

Unlike most central banks that manage monetary policy through the interest rate, the MAS uses the exchange rate as its main policy tool because Singapore is an open economy that depends heavily on trade.

This refers to the Singdollar nominal effective exchange rate (S$NEER) – the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies from Singapore’s major trading partners.

The S$NEER is allowed to float within an unspecified band. Should it go out of this band, the MAS steps in by buying or selling Singapore dollars.

The central bank also changes the slope, width and mid-point of this band when it wants to adjust the pace of appreciation or depreciation of the local currency based on assessed risks to Singapore’s growth and inflation.

The decision taken by MAS on Thursday is to “raise slightly” the slope of the S$NEER policy band from zero per cent previously, while keeping the width of the band and the level at which it is centered unchanged.

Raising the slope of the policy band effectively allows the Sing dollar to appreciate, making imports cheaper and exports more expensive.

The Sing dollar gained some ground against the US dollar on the back of the monetary policy announcement and was last seen about 0.2 per cent higher at 1.3493 at 1.52pm.

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16 minutes ago, socrates469bc said:

those anal-ysts jin kumgong.

 

mas think differently from many other central banks becos mas' priority is control inflation and not maintain full employment.

 

this policy is set in stone by GKS in mof and then HSS in mas.

If they are not kumgong, they will be day traders and not anal-ysts

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