The MAS has a unique approach to monetary policy.
Unlike most central banks that manage monetary policy through interest rates, it uses an 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$NEER) – the exchange rate of the Singapore dollar managed against a trade-weighted basket of currencies from Singapore’s major trading partners.
The MAS allows the S$NEER to float within an unspecified band. Should it go out of this band, it steps in by buying or selling Singapore dollars.
The central bank also changes the slope, width and mid-point of the 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 slope is probably the most common tool used by the MAS to adjust the band.
Simply put, the slope determines the rate at which the Singdollar appreciates. If the slope is reduced, this means the local currency will be allowed to strengthen at a slower pace. It strengthens at a faster pace when the slope is increased.
The mid-point is a tool generally reserved for “drastic” situations, such as recessions, when the outlook for growth and inflation sees an abrupt and rapid change.
Compared to tweaks in the slope, an adjustment in the mid-point either upwards or downwards is likely to yield a quicker and bigger impact on the currency.
This was last done in October 2022 when the MAS re-centred the mid-point of its band to rein in inflation running near multi-year highs.
Lastly, the width controls how far the Singdollar can fluctuate. This means the wider the band, the more volatile the currency can be. It is typically reserved for periods of increased uncertainties or volatility.
For instance, the band was widened in October 2001 after the September 11 terrorist attacks in the United States led to extreme volatility in the financial markets.
More recently in October 2010, the width was also widened slightly “in view of the volatility across international financial markets”.
