You will be able to explain why MAS uses the exchange rate as its main tool and what that means for interest rates here.
Ask most people how a central bank fights inflation and they'll say it raises interest rates. That is how the US Federal Reserve and the European Central Bank do it. They set a short-term interest rate, and that rate spreads out into loans, savings and spending. Singapore's central bank, the Monetary Authority of Singapore, works differently. Once you see why, a lot of Singapore money news starts to make sense.
MAS manages the value of the Singapore dollar instead, though it doesn't peg it to any single currency. It tracks the Singapore dollar against a basket of the currencies of Singapore's main trading partners, weighted by how much trade happens with each. That measure is called the Singapore dollar nominal effective exchange rate, or S$NEER. MAS lets the S$NEER move within a policy band that it does not publish, and it changes the band when it wants to tighten or ease.
Why the exchange rate? Because of what Singapore is. It is a small economy that trades a lot with the rest of the world. Much of what households here consume is imported: food, fuel, cars, phones, clothes. When the Singapore dollar strengthens, those imports cost fewer Singapore dollars and local prices cool fairly quickly, while a weaker dollar pushes imported prices up. In an economy like this, the exchange rate moves inflation more directly than a change in interest rates would.
There is a second reason, and it explains something you will see in your own home loan and savings. Money moves freely in and out of Singapore. Economists have a well-known result for this, sometimes called the impossible trinity: a country with free movement of capital cannot control both its exchange rate and its interest rates at the same time, so it has to choose, and MAS chose the exchange rate.
That choice has a consequence for you. Because MAS does not set an interest rate, Singapore interest rates are mostly set by markets, and they tend to follow global rates, especially US rates. When the Fed raises rates, borrowing costs in Singapore usually rise as well, even though MAS has not raised any rate at all. When the Fed cuts, local rates tend to drift down. In module 2 you will follow that chain step by step, from a decision in Washington to the rate on your mortgage and your fixed deposit.
So when you read that MAS has tightened monetary policy, translate it correctly. It means MAS has allowed the Singapore dollar to rise faster against the basket, or has moved the band higher. It does not mean MAS raised an interest rate. When MAS eases, it lets the dollar rise more slowly, or fall.
What does a stronger Singapore dollar do to you? Your next holiday gets cheaper, and so do imported groceries and online purchases from overseas. Prices here rise more slowly than they would have. On the other side, Singapore companies that sell abroad find their goods dearer for foreign buyers, and tourists find Singapore more expensive. If your job depends on exports or tourism, a strong dollar can squeeze your employer. And any foreign investments you hold are worth fewer Singapore dollars when the Singapore dollar rises.
None of this works overnight. Policy changes take months to show up in prices and jobs, which is one reason MAS publishes its reasoning in a regular monetary policy statement. You will read one in lesson 1.4.
Before you move on, test your understanding with the activity for this lesson. Write three sentences explaining to a friend why MAS tightening does not mean MAS raised an interest rate.
Write three sentences explaining to a friend why MAS tightening does not mean MAS raised an interest rate.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).