The Monetary Authority of Singapore (MAS) unexpectedly tightened monetary policy by adjusting the Singapore dollar’s exchange rate policy rather than changing interest rates.
| Photo Credit:
Reuters
Singapore’s central bank
tightened its monetary policy settings unexpectedly on Monday,
with inflation projected to step up in the months ahead.
Singapore’s central bank has a unique method of managing
monetary policy, tweaking the exchange rate of its currency
instead of changing domestic interest rates like many economies.
The Monetary Authority of Singapore (MAS) sets the path of
what it calls the policy band of the Singapore dollar nominal
effective exchange rate (S$NEER), thus strengthening or
weakening the local currency against those of its main trading
partners.
WHY DOES SINGAPORE USE THIS METHOD?
Singapore is a small and trade-reliant economy. Gross
exports and imports of goods and services are more than three
times its gross domestic product (GDP). Almost 40 cents of every
Singapore dollar spent domestically is on imports.
That means the exchange rate has a much bigger influence on
inflation than domestic interest rates.
For example, an appreciation of the Singapore dollar against
the currencies of its major trading partners will reduce prices
of imported goods and services. This dampens the prices that
households have to pay.
WHAT IS THE S$NEER?
The S$NEER is an index of the Singapore dollar’s trade-weighted
exchange rate against the currencies of the island’s major
trading partners.
The central bank says this allows the Singapore dollar to
perform collectively in relation to its major trading partners,
which is what matters for general price levels in Singapore.
HOW DOES THE S$NEER POLICY BAND WORK?
MAS does not set the precise level of the exchange rate or
control it in real time. Instead, the S$NEER is allowed to move
up and down within a policy band, the exact levels of which are
not disclosed. If it goes out of this band, the MAS steps in by
buying or selling Singapore dollars.
The policy band has three parameters that the MAS can
adjust. Until 2024, these parameters were reviewed at least
twice a year, typically in April and October.
Additional reviews can be held if conditions demand an
immediate change in settings, such as in 2022 when high
inflation triggered two off-cycle moves.
From 2024, the central bank started making monetary policy
announcements every quarter, saying it allowed policymakers to
provide their assessment of the economic outlook in a more
timely fashion.
The three policy levers are the slope, the level and the
width of the band.
Adjusting the slope will influence the pace at which the
Singapore dollar strengthens or weakens.
Adjusting the level, or mid-point, of the policy band allows
for an immediate strengthening or weakening of the S$NEER,
making this a tool for drastic situations such as a recession.
By widening the policy band, the MAS can allow for more
volatility of the S$NEER.
Published on July 27, 2026
