A primary objective of the MAS is to ensure price stability as a basis for sustained growth of the Singapore economy.
Price stability, according to the central bank, is a situation in which broad-based inflation is contained, and is not a significant consideration for households and businesses when they make consumption and investment decisions.
The MAS uses the exchange rate as its main policy tool because Singapore is a small and open economy that depends heavily on trade. The exchange rate also has “a much stronger influence” on inflation than the interest rate, it said on its website.
Its monetary policy framework is centred on managing the Singapore dollar against a trade-weighted basket of currencies, known as the Singapore dollar nominal effective exchange rate (S$NEER).
MAS allows the S$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.
Shifting the slope of the policy band is probably the most common tool used by the MAS.
Simply put, the slope determines the rate at which the Sing dollar 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.
Occasionally, the MAS would also adjust the level of the mid-point or the width of the band.
The former 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.
Meanwhile, the width of the policy band controls how far the Sing dollar 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 Sep 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”.