3 biggest effects of tight monetary policy on Singapore's economy

Is it really effective?

According to the Monetary Authority of Singapore, the tight monetary policy stance since April 2010 has been effective in containing inflationary pressures and keeping the economy on an even keel. Mr Ravi Menon, managing director of the MAS, said the tight policy has had three important effects.

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First, the tighter monetary policy stance has successfully restrained imported inflation despite significant price pressures in the external environment during this period.

In foreign currency terms, wholesale price inflation among Singapore’s major trading partners averaged around 5% per annum from 2010 to 2012.

In comparison, overall imported inflation in Singapore dollar terms has been fairly benign, averaging slightly less than 2% per annum in this period.

Specific examples illustrate well the efficacy of the exchange rate in dampening imported inflation.

Global oil prices have risen by an average of 16% per year in 2010-2012. However, local petrol pump prices have only increased by 8%. Global food prices, as measured by the IMF Food and Beverage Price Index, rose by 9% per annum during this period, but domestic food prices increased by just 2%.

Second, the stronger Singapore Dollar has dampened inflation indirectly by moderating the demand for our exports. In turn, this has eased the demand pressure on domestic resources such as labour and industrial space. This has reduced business cost pressures and thus overall inflation.

Third, the tighter monetary policy stance has nudged the level of output closer to its potential, thus preventing the economy from overheating. The positive output gap is projected to narrow from nearly 4% of potential GDP in 2010 to around 1% this year.

MAS’ policy stance has begun to yield results. Both CPI-All Items inflation and MAS Core Inflation have eased from their recent peaks.

CPI-All Items inflation has fallen from 5.5% in Q3 2011 to 4.0% in Q1 2013. At 1.6% in the first quarter of this year, MAS Core Inflation is running at nearly half the pace seen a year ago.

But there is no room for complacency. The pace at which business costs are passed through to consumer prices could pick up in the latter half of this year. MAS will remain vigilant in ensuring that the recent gains in controlling inflation are sustained.