Singapore’s Monetary Policy And Its Outlook In The Short-run
Singapore’s economy is quite small compared to the economies of some other counties but it is an economy that has been doing exceptionally well over the past few years. The city-state has a monetary policy that is heavily pegged heavily on the exchange rate and the monetary policy is controlled by the country’s central bank also known as the Monetary Authority of Singapore (MAS).
The current state of Singapore’s monetary policy
The monetary policy in Singapore currently remains unchanged mainly due to the relative stability that the country’s economy has been experiencing. This is despite the fact that the country imports most of the products consumed locally. The heavy reliance on imports means that the exchange rate between Singapore’s currency and foreign currencies have a bigger influence on inflation than interest rates. This explains why exchange rate regulation is the best monetary policy tool used by the MAS.
The MAS built the monetary policy framework on the Singapore dollar nominal effective exchange rate (S$NEER). The latter monitors the exchange rate of the Singapore dollar against a trade-weighted basket of currencies.
Some of the factors affecting Singapore’s monetary policy
- Interest rates- As noted earlier, Singapore bases its monetary policy on exchange rate regulation because exchange rates have a major influence on the economy’s performance. For example, if the Singapore dollar becomes weaker, then imports become more expensive but on the flip side, the cost of exports becomes more competitive. The government therefore aims to maintain a favorable balance.
- Global trade- The MAS also has to account for global trade when making decisions regarding monetary policy. For example, some events affecting global trade or the countries that trade with Singapore may also affect trade between Singapore and foreign countries.
- Inflation- Like many countries, Singapore aims to make sure that the level of inflation in the country is in check because too much inflation can hurt an economy. The MAS therefore makes sure that the inflation levels are good through exchange rate adjustments. Unchecked inflation levels could negatively impact trade because it would reduce trader and investor appetite for conducting trade. This is especially true if it means that they have to spend more on goods that they could previously import at a lower cost.
The impact of mobile payments on Singapore’s monetary policy
Mobile payments have increasingly become more popular in Singapore. Mobile payments in the country are so popular that they are the preferred payment type that is used by most Chinese tourists when they visit the city-state. To put things into perspective, roughly 1 out of every tourist that visits Singapore is Chinese and about 77 percent of the Chinese tourists prefer to use mobile payments while in Singapore. The mobile payment services therefore contribute greatly towards ensuring decent levels of revenue circulation and also foreign exchange.
The monetary policy outlook in the short term
Singapore’s monetary policy has remained constant for some time. However, there have been expectations of a looser monetary policy that might be announced soon. Note that the government uses monetary policy as a tool for steering the economy in the right direction and also to adjust to changing variables in the market.
The expectations that the MAS will revise its monetary policy are based on the fact that there have been some changes in the market. Those changes are related to the recent outbreak of the Coronavirus in China and this is a classic example of how a series of events in one market can affect or influence the monetary policy changes in another country.
Singapore’s government recently announced a travel advisory in which it banned the entry of Chinese tourists in an effort aimed at preventing the spread of the outbreak. The fact that Chinese tourists contribute significantly to Singapore’s tourism industry points towards a direct impact. For example, hotels, resorts, malls and other businesses that rely heavily on the tourism industry have already started to feel the heat.
The government’s likely response to the changing economic situation
Analysts have already started to speculate that Singapore’s government will respond to the effects of the Coronavirus on the country’s economy by loosening its monetary policy. The speculation is based on the fact that such situations usually influence the government to adjust its monetary policy so that it will still be in favor of the local economies. In other words, the government will likely implement a policy that will allow businesses to stay afloat without resulting in measures such as retrenchments.
The country’s government recently revealed its stance on the matter. MAS revealed that Singapore’s currency’s latest exchange rate range proves adequate room to facilitate an easing of the local currency. The Singapore central bank was responding to media questions about its plan of action especially now that local traders expect it to loosen its policy as a means of adjusting to the volatile situation caused by the Coronavirus.
The statement by Singapore’s government regarding the easing of the currency sent the Singapore dollar spiraling to a 4-month low. The currency closed Tuesday’s trading session at 1.3812 against the U.S dollar. The situation has its advantages and disadvantages. For example, a weaker Singapore dollar raises the cost of imports, making them more expensive. Those who deal with imports therefore end up taking a hit. On the flip side, a weaker Singapore dollar also means that exports from Singapore become more competitive in foreign markets.
MAS assured the media that it is keeping a close eye on the economic developments in the country and that it is still on schedule with the 6-month policy review which is scheduled for April. Philip Wee, a foreign exchange analyst at DBS Bank believes that the MAS statement highlights the lack of urgency to roll out monetary easing measures before the next policy review in April. The analyst also highlighted the U.S dollar’s ability to maintain a strong performance in 2019 despite the drawbacks resulting from the U.S-China trade war. There will thus likely be no immediate measures over the short-term but things might change looking forward especially if the Coronavirus threat is not subdued in the next few months.