ECONOMYNEXT – The Monetary Authority of Singapore said it will keep appreciating the Sing dollar to bring inflation down, while warning that an external downturn can abruptly bring the price index down.
The MAS appreciates the currency (usually when the Fed prints money and creates inflation) along a nominal effective exchange rate band (NEER) managing to keep inflation at 2 percent or lower and interest rates that of the US.
MAS said it core inflation (which includes food and energy but not accommodation and personal transport – due to complications like penalty fees), has started to ease and will fall to 2 percent by end 2024.
“CPI-All Items inflation is forecast to average 1.5–2.5 percent as well in 2025,” the MAS said in its most recent monetary policy statement.
“Accommodation inflation should slow as leasing demand falls, partly offsetting an anticipated pickup in private transport inflation amid still-firm car purchases.
To be able to appreciate the currency at will, the Monetary Authority of Singapore does not have a policy rate where macro-economists can print money to cut rates and trigger reserve losses and currency crises.
“…[T]he choice of the exchange rate as the intermediate target of monetary policy implies that MAS gives up control over domestic interest rates (and money supply),” the MAS said in a explanatory note.
“In the context of free capital movements, interest rates in Singapore are largely determined by foreign interest rates and investor expectations of the future movements in the Singapore dollar.
“Domestic interest rates have typically been below US interest rates and reflect market expectations of a trend appreciation of the Singapore dollar over time.”
Singapore usually sells MAS Securities to run mildly deflationary policy. For many year the MAS has also converted EPF deposits in to fiscal foreign reserve and invested them in the GIC.
“The exchange rate has been an effective tool to manage inflation in the Singapore economy,” the MAS said in a policy note.
“Over the past forty years or so since the exchange rate framework has been in place, domestic inflation has been relatively low, averaging 1.9 percent per annum from 1981 to 2023.
“As a result of the long record of low inflation, expectations of price stability in Singapore have become more entrenched over the years. The exchange rate system has also helped to mitigate the adverse effects of short-term volatility on the real economy…”
Sri Lanka usually cuts rates with inflationary open market operations (acquires Treasuries or other domestic assets) trigger forex crisis and pushes up rates sky high in a stabilization crisis triggering a downturn.
Over the past two years however the central bank has run deflationary policy and sharply appreciated the currency, reversing some of the depreciation since 2022.
Related
Sri Lanka deflation 0.8-pct in 12-months to October 2024, up 0.3-pct over 25 months
The Colombo Consumer Price Index dropped 0.8 percent in the 12-months to October. The index had grown only 0.3 percent since September 2022, when balance of payments deficits from inflationary policy stopped. (Colombo/Nov01/2024)