The central bank of Singapore tightened its monetary policy in April, 2018. This was the first such move since 2012. For the last three years, the Monetary Authority of Singapore had held a neutral stance. Many economists were in favor of such a neutral stance although there were others who wanted a tighter monetary policy, especially since the economy has shown signs of steady recovery and subsequent growth in the last one year. This is reflected in the gross domestic products figures. Exports are on the rise, having a direct impact on the value of the Singaporean dollar. Inflation has been healthy for many months now.
It should be noted that the Monetary Authority of Singapore uses the dollar and its valuation vis-a-vis major currencies as the primary tool to determine its core policy. While tightening the monetary policy, the autonomous authority has also expanded the currency band. However, there is no disclosure as to what extent the band has been steepened in the latest move. Although the central bank is optimistic about the steady growth of the economy, there is considerable concern over the tensions between the two largest economies of the world. The United States and China have engaged in a kind of a trade war for many months now. The tensions were mildly doused in recent weeks when both China and the United States expressed their stands in favor of free market economies, more trade and less protectionism. However, there has been no concrete development that would signal the thawing of tensions which have built up quite severely. Both countries have imposed restrictions on trade with one another, hitting the multinational corporations and significant exporters of both countries.
The Monetary Authority of Singapore has increased or steepened the slope of the policy band for Singaporean dollar from zero per cent. But there has been no change to the midpoint or width of the policy band. In its official statement, the MAS has said that the change in its stance is in sync with the gradual albeit modest appreciation of nominal effective exchange rate and that the expanded policy band will help with price stability in the medium term.
The central bank is expecting the economy to keep growing throughout 2018. It has also cautioned the markets that the economy is at risk of slowing down or stagnating if the trade spat between the United States and China spirals out of control. It is not just Singapore that would have to deal with some adverse effects. There will be serious consequences for many economies and global trade.
The local factors are encouraging with the trade reliant economy of Singapore growing at around 1.4% by the end of the first quarter, the GDP has expanded by around 4.3% during the same period and the dollar has been appreciated, although it is quite nominal. Most economists don’t see any risk with the tightening of the monetary policy. Many feel it was the obvious thing to do but some had propagated holding onto a neutral stance.
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