Monetary Policy in Singapore and the Global Financial Crisis

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Challenges for the Singapore Economy

tightened in April 2008 by re-centring the policy band upwards to

the prevailing level of the TWS$.

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Then in October 2008, against the backdrop of a fragile global

economy and dissipating inflationary pressures MAS moved to a neu-

tral stance by flattening the TWS$ policy band and in April 2009

eased further by re-centring the band downwards to the prevailing

level of the TWS$ but retaining the zero percent appreciation path.

In October 2009, with the TWS$ fluctuating in the upper part of the

policy band due to weakness in the US dollar and a surge in capital

inflows into the region, the zero percent appreciation was maintained

but with no change to the width of the policy band or the level at

which it was centred. This was a response to the rebound in the econ-

omy in the second and third quarters of 2009.

Finally, in April 2010, and in concert with other central banks in

the region, MAS began once again to tighten its monetary policy

stance by re-centring the exchange rate policy band to the prevailing

level of the TWS$ and shifting the policy band from a neutral zero

percent appreciation back to one of ‘a modest and gradual apprecia-

tion’. This is predicated on the view that the domestic economy has

now rebounded from the downturn and is expected to continue on a

firm recovery path. The official growth forecast for 2010 was revised

upwards to between 7% and 9% in April 2010 and further in July to a

sizzling 13–15%. At the same time, inflationary pressures resulting

from rises in global commodity prices as well as some domestically-

driven cost pressures are expected to increase in the months ahead as

the labour market tightens and liquidity remains high given low

global interest rates and a continuing inflow of foreign capital.

Monetary Policy in Singapore and the Global Financial Crisis

149

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There was some debate about whether MAS should have tightened further in

October 2007 given the sharp rise in inflationary pressures. MAS’ own counterfac-

tual simulations suggest, however, that had there been further tightening this would

have injected greater volatility into the economy and exacerbated the fall-off in prices

when the global economy slowed in the second half of the year, taking into account

the long time lags typically associated with the exchange rate pass-through process.

Thus, the subsequent decline in economic activity would have necessitated a sharper

reversal of policy in October 2008.

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