Central bank stands firm on current monetary policy

MAS managing director Ravi Menon said the prevailing policy stance "remains appropriate" despite grumblings of its failure to arrest inflation.

"The persistence in Headline Inflation has led to some questions about efficacy of Singapore’s exchange rate-centred monetary policy framework. MAS has studied this issue very carefully. We are assured that monetary policy framework remains effective and the current policy stance remains appropriate," Mr. Menon said in the Monetary Authority of Singapore annual report press conference held yesterday.

The central bank managing director insists that monetary policy has had restraining effect on inflation, though yielding that it carries limitations and that its effects are "taking longer than usual."

"Monetary policy in Singapore has been tight for more than two years now. Since April 2010, MAS has put in place a modest and gradual appreciation path for the trade-weighted Singapore dollar policy band. In April this year, MAS tightened monetary policy by increasing the slope of the policy band further. This exchange rate policy stance has had a restraining effect on inflation through two channels: first, by filtering import prices; and second, by moderating economic activity," Mr. Menon said.

"First, a stronger exchange rate has helped to filter import prices. Take, for instance, oil prices. Since April 2010, global oil prices have risen by an average of 15% year-on-year, but domestic petrol pump prices have only increased by 8%, reflecting the effects of the exchange rate. Second, the stronger Singapore dollar has had a restraining effect on activity in the economy, especially through the export-oriented sectors. This has helped to dampen business cost pressures," he said.

"These two effects have been quite significant in helping to dampen inflation. Since April 2010, the trade-weighted Singapore Dollar has appreciated by 3.3% per annum, reflecting MAS’ tighter monetary policy stance. Our simulations show that if this appreciation had not taken place, CPI-All Items inflation this year would have been 6.5-7.0%, rather than the 4.0-4.5% we have projected," he added.

"But there is a limit to how far we can use exchange rate policy to contain inflation. First, while exchange rate policy is effective against imported inflation and domestic cost pressures arising from rapid economic growth, it is less so against inflation in housing rentals and car prices. Even so, housing prices and car prices cannot keep rising rapidly in an environment of weakening economic growth. The measures taken to address supply-side issues in the housing market and public transport will also help to ease price pressures in these two areas. Second, too rapid a rate of appreciation of the Singapore Dollar can significantly hurt our economic performance, especially in light of heightened uncertainty in the external environment," he said.

"In sum, exchange rate is taking longer than usual to moderate inflation, but it remains our broadest and most effective anti-inflation tool. MAS will continue to keep a close watch on developments in the global economy and price pressures in the domestic economy. The next Monetary Policy Statement will be released as scheduled in mid-October 2012," he said further.