The International Financial Market

Topics: Inflation, Macroeconomics, Foreign exchange market Pages: 6 (1902 words) Published: June 13, 2014
Since 1981, monetary policy in Singapore has been centred on the management of the exchange rate. The main objective is to promote price stability as a basis for a sustainable economic growth. The exchange rate represents an ideal intermediate target of monetary policy in the context of the small and open Singapore economy. It is rather controllable through direct interventions in the foreign exchange markets and it bears a stable and predictable relationship with the price stability as the final target of policy over the medium-term. There are several key features of the exchange rate system in Singapore.

First, Singapore currency is managed against a number of currencies with our major trading partners and competitors. This currencies are tag with weights in accordance to the importance of the country to Singapore trading relations worldwide. This feature is revised periodically to take into account of changes in trading patterns.

Second, Monetary Authority of Singapore(MAS) operates a managed float regime for the Singapore dollar. The trade-weighted exchange rate allows the currency to fluctuate within a policy band, the level and direction is announced semi-annually to the market, normally in April and October. This provides a measures to accommodate short-term fluctuations in foreign exchange markets and the flexibility in managing the exchange rate.

Third, the exchange rate policy band is semi-annually reviewed to ensure it remains consistent with the underlying fundamentals of the economy. It is constantly assess exchange rate to prevent misalignment in the currency value. The Monetary Policy Statement(MPS) is released after each review, providing information on recent movements of the exchange rate and explaining the stance of exchange rate policy. An accompanying report, the Macroeconomic Review, provides detailed information on the assessment of macroeconomic developments and trends in the Singapore economy, and is aimed at enhancing market and public understanding of the monetary policy stance.

Fourth, the choice of the exchange rate as the intermediate target of monetary policy implies that MAS gives up control over domestic interest rates. Due to free capital movements, interest rates in Singapore are mainly determined by foreign interest rates and investor expectations of the future movements in the Singapore dollar. The exchange rate system has also helped to mitigate the adverse effects of short-term volatility on the real economy, while at the same time ensuring that the exchange rate remains aligned with economic conditions and fundamentals. The success of the system owes much to the strong economic fundamentals of Singapore. These include prudent fiscal policy, flexible product and factor markets, sound financial system, and robust domestic corporate sector.

Singapore Monetary Policy 2011/12

April 2011

In October 2010, MAS slightly increased the slope of the S$NEER policy band. The policy was made in consideration of increase risks to inflation due to expected high levels of domestic economic activity. The policy band was slightly widened to compromise volatility across international financial markets.

Chart 1
S$ Nominal Effective Exchange Rate (S$NEER)
 
Since then, the S$NEER (Chart 1) has appreciated gradually within the upper half of the policy band. This took place in the context of a general strengthening in regional currencies given broad-based weakness in the US$ and continued investor interest in higher-growth. OUTLOOK FOR 2011

The global economy is expected to grow at a moderate pace in 2011, notwithstanding the increased uncertainty arising from the spike in oil prices and the calamity in Japan. Supported by a gradual improvement in the labour market and accommodative fiscal measures, the US economy should continue on its recovery path. In Asia ex-Japan, resilient household spending and a increase in business investment are...
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