The International Financial Market

Since 1981, monetary policy in Singapore has been centered on the management of the exchange rate. The main objective is to promote price stability as a basis for a sustainable economic growth. The exchange rate represents an ideal intermediate target of monetary policy in the context of the small and open Singapore economy. It is rather controllable through direct interventions in the foreign exchange markets and it bears a stable and predictable relationship with the price stability as the final target of policy over the medium-term.

There are several key features of the exchange rate system in Singapore. First, Singapore currency is managed against a number of currencies with our major trading partners and competitors. This currencies are tag with weights in accordance to the importance of the country to Singapore trading relations worldwide. This feature is revised periodically to take into account of changes in trading patterns. Second, Monetary Authority of Singapore(MASS) operates a managed float regime for the Singapore dollar.

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The trade-weighted exchange rate allows the currency to fluctuate within a policy band, the level and direction is announced semi-annually to he market, normally in April and October. This provides a measures to accommodate short-term fluctuations in foreign exchange markets and the flexibility in managing the exchange rate. Third, the exchange rate policy band is semi-annually reviewed to ensure it remains consistent with the underlying fundamentals of the economy. It is constantly assess exchange rate to prevent misalignment in the currency value.

The Monetary Policy Statement(MSP) is released after each review, providing information on recent movements of the exchange rate and explaining the stance of exchange rate policy. An accompanying report, the Macroeconomic Review, provides detailed information on the assessment of macroeconomic developments and trends in the Singapore economy, and is aimed at enhancing market and public understanding of the monetary policy stance. Fourth, the choice of the exchange rate as the intermediate target of monetary policy implies that MASS gives up control over domestic interest rates.

Due to free capital movements, interest rates in Singapore are mainly determined by foreign interest rates and investor expectations of the future movements in the Singapore dollar. The exchange rate system has also helped to mitigate the adverse effects of short-term volatility on the real economy, while at the same time ensuring that the exchange rate remains aligned with economic conditions and fundamentals. The success of the system owes much to the strong economic fundamentals of Singapore.

These include prudent fiscal policy, flexible product and factor markets, sound financial system, and robust domestic corporate sector. The International Financial Market By Vinson April 2011 In October 2010, MASS slightly increased the slope of the S$INNER policy band. The policy was made in consideration of increase risks to inflation due to expected high levels of domestic economic activity. The policy band was slightly widened to compromise volatility across international financial markets.

Chart 1 S$ Nominal Effective Exchange Rate (S$INNER) Since then, the S$INNER (Chart 1) has appreciated gradually within the upper half of the policy band. This took place in the context of a general strengthening in regional currencies given broad-based weakness in the IIS$ and continued investor interest in higher-growth. OUTLOOK FOR 2011 The global economy is expected to grow at a moderate pace in 2011, notwithstanding the increased uncertainty arising from the spike in oil prices and the calamity in Japan.

Supported by a gradual improvement in the labor market and accommodative fiscal measures, the US economy should continue on its recovery path. In Asia ex-Japan, resilient household spending and a increase in business investment are expected to underpin growth. In Singapore, while a temporary slowdown is forecast for Q, economic growth is projected to be sustained across a wide range of industries for the rest of the year. Reflecting in part the robust expansion in IQ, GAP growth for the year as a whole is likely to be at the upper end of the 4-6% forecast range.

MONETARY POLICY Economic activity is likely to be sustained at a high level for the rest of the year, even as the underlying growth momentum moderates. With factor markets tight, domestic cost and price pressures will remain firm. MASS have re-centre the exchange rate policy band upwards. The exchange rate policy band will be re-centered below the prevailing level of the S$INNER. This adjustment takes into account the tighter policy dance adopted in April and October 2010, which will continue to have a restraining the band.

This policy will ensure price stability in the medium term while keeping growth on a sustainable path. October 2011 MASS re-centered the S$INNER policy band upwards in April, with no change to the slope and width of the band, amidst tight factor markets and strong pressures on domestic costs and prices to tackle the inflation. From April to early September 2011, the S$INNER (Chart 1) had generally appreciated and remained within the upper half of the policy band. This reflected the broad- eased weakness in the IIS$ and investor interest in higher-growth economies.

OUTLOOK FOR 2011 AND 2012 The Singapore economy has weakened over the last six months, weighed down by supply-side disruptions arising from the earthquake in Japan and, more recently, by faltering global demand. The outlook for the global economy has deteriorated sharply due to the increased of uncertainty in financial markets. The Euro zone economy, faced with debt crisis, will be constrained by fiscal austerity and tightening credit conditions. Private consumption in the US continues to be hampered by the sluggish Barbour market and housing prices.

Additionally firms remain cautious in their investment spending. With final demand in the advanced economies softening, growth in Asia will slow down. At the same time, the global IT industry continues to experience excess supply and could see further correction in output in the coming quarters. Against this backdrop, Singapore GAP growth in 2011 is expected to be around 5%. With the weak external environment likely to continue, the Singapore economy will expand slowly in 2012 and growth would be most likely to be below its potential rate of 3-5%.

MONETARY POLICY Given the stresses and fragility in the advanced economies, the prospects for growth in Singapore major trading partners have deteriorated. With the slowdown in demand, growth in the Singapore economy could fall below its potential rate of 3-5%. Thus, core inflation should ease next year. Singapore Monetary Policy 2012/13 April 2012 MASS maintained the S$INNER policy band on a modest and gradual appreciation path in the last policy review in October 2011.

However, the slope of the policy band was reduced as economic activity was expected to slow, and hence ease the tightness in he labor market and alleviate core inflationary pressures. Over the last six months, the S$INNER was largely in the lower half of the policy band. It weakened in November 2011 due to increased global risk aversion arising from the point of the policy band as investor sentiment picked up following improved macroeconomic data from the US and indications of some stabilization in the Euro zone.

OUTLOOK FOR 2012 The outlook for the global economy remains less intense, but the most significant risks have been contained. In the US, business sentiments have improved, and the covers of the labor market is supporting private consumption. Although the Euro zone is still likely into a recession in 2012. Growth in Asia ex-Japan will continue to be held up in part by domestic demand, even as export growth remains muted. Against these developments, the Singapore economy will experience modest growth of 1-3% in 2012.

With economic activity turning out somewhat stronger than anticipated in IQ 2012 and resource markets tightening, inflation pressure have persisted. MASS Core Inflation, which excludes private road transport and accommodation costs, rose from 2. 4% in Q 2011 to 3. % in the first two months of 2012. This reflected a more rapid pass-through of higher wage costs to prices of some consumer services. Looking ahead, external inflationary pressures are likely to continue, due to higher oil prices. Car prices could also rise further in response to the tight COKE supply, especially if car De-registrations remain at current low levels.

MONETARY POLICY The risks in the key industrialized economies have receded, global growth is likely to remain below trend. Core inflationary pressures have persisted, but will likely ease in the latter half of the year. MASS will therefore continue with the policy of a modest and gradual appreciation of the S$INNER policy band. The slope will be increased slightly, and there will be no change to the level at which the band is centered. October 2012 In April 2012, MASS increased the slope of the S$INNER policy band slightly.

A narrower policy band was restored with no change to the level at the band was centered. This policy stance was aimed at anchoring inflation expectations, ensuring medium-term price stability and keeping growth on a sustainable path. The S$INNER has appreciated towards the upper bound of the policy band over the sat six months, reflecting positive risk arising from policy responses in US and Europe. OUTLOOK FOR 2012 AND 2013 The Singapore economy has weakened over the last two quarters, alongside some softening in global economic activity.

The manufacturing, wholesale and transport & storage industries, bore the brunt of the downturn. However, construction and financial services remained resilient. Having considerable uncertainty over the evolving fiscal situation in the US and Euro zone, central bank policy initiatives worldwide have reduced the risk of a severe global recession. The major industrialized economies as a whole are projected to expand at a sub-par pace in 2013, given ongoing delivering in both the private and public sectors. This will support a moderate growth in Asia, where domestic incomes and demand are expected to remain.

Growth in 2013 is likely to come in slightly below the economy’s potential rate, the level of output should remain above its underlying potential and have generally been muted in recent quarters, in line with the weaker external environment and the appreciating Singapore dollar. Nevertheless, domestic costs continued to rise amid a tight labor market. Unit labor costs increased due to weak productivity growth in the services sectors. Looking ahead, imported inflation, will be susceptible to temporary spikes in food prices due to weather-related disruptions.

Domestic supply-side factors will become more binding. In particular, persistent tightness in the labor market will support slightly stronger wage increases in 2013, which will continue to be passed through to consumer prices. MASS Core Inflation is expected to average around 2. 5% in 2012 and 2-3% next year. MONETARY POLICY The appreciating stance of exchange rate policy since April 2010 has provided some strains on the build-up of inflationary pressures, which in part reflects supply-side constraints in the economy.

MASS Core Inflation receded recently but will face upward pressure from higher food and services costs. MASS will therefore maintain the policy of a modest and gradual appreciation of the S$INNER policy band and there will be no change to the slope and width of the policy band. This policy stance is assessed to be appropriate in containing inflationary pressures and keeping the economy on a path of restructuring towards sustainable growth.