On Monday (30 March), the Monetary Authority of Singapore (MAS) stated that it will set the rate of the appreciation of SGD to zero per cent. This new appreciation rate is at the prevailing lower level of the exchange policy rate band, in preparation for the large economic contraction this year.
Most analysts anticipated aggressive policy easing following the forecast by the Government that the economy will slow down by 1 to 4 per cent in 2020.
MAS remarked that “GDP growth will eventually recover following the abrupt downshift in the level of activity, but there is significant uncertainty over the depth and duration of this recession.”
What is monetary policy?
Monetary policy is a policy instrument designed to control inflation, the consumption of goods and services and liquidity in addition to other economic goals.
Government optimism about economic outlook is also reflected by monetary policy. For instance, currency may be depreciated by the central bank in times of economic slowdown in order to make exports cheaper for the global market.
However, currency depreciation also leads to more expensive imports for the citizens, which would reduce the consumption of imported goods by citizens.
Monetary policy in Singapore & the S$NEER
The Monetary Authority of Singapore (MAS) is the central bank that regulates the SGD by weighing the currency value against a basket of currencies, which is not revealed in order to prevent speculative activities.
The objective is to keep the value of SGD stable in the medium-run, which is the time frame of the next two and five years.
The policy band, which are boundaries set by MAS, lets the value of SGD appreciate and depreciate within a range. This band is denoted as the Singapore Dollar Nominal Effective Exchange Rate or S$NEER.
When the value of SGD exceeds the band’s boundaries, MAS intervenes by buying or selling the currency to influence the currency value to return to its original limits.
On the basis of assessed risks to the country’s growth and inflation, the slope, width and mid-point of the policy are also adjusted and announced at MAS’ two scheduled policy meetings.
Normally, these meetings are held in April and October, unless there is a necessity. This year, the scheduled April meeting was brought forward to 30 March.
MAS’ latest policy
On Monday, MAS flattened the slope of the band in order to set the SGD appreciation rate at zero. Compared to the previous stance of a “modest and gradual appreciation”, the new rate is an easing done by MAS.
How rapidly the SGD appreciates depends on the slope of the band. Appreciation of SGD is quicker if the slope is sharper whereas a zero slope makes appreciation slower than before.
The midpoint of the currency has also been lowered by MAS so that the path of appreciation and depreciation is lower. According to MAS, a zero per cent appreciation path at the prevailing level of the S$NEER has been set. This level is slightly weaker and below the mid-point of the policy band.
MAS stated: “This policy decision hence affirms the present level of the S$NEER, as well as the width and zero per cent appreciation slope of the policy band going forward, thus providing stability to the trade-weighted exchange rate.”
The fluctuation of the SGD is not limited because the width of the band still remains the same.