Martin Lee @ Sg
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Effects of Appreciating Singapore Dollar

Mr Lim Hng Kiang, Minister for Trade and Industry and Deputy Chairman:

singapore dollar1. Singapore adopts an exchange rate-centred monetary policy to maintain price stability for sustained economic growth over the medium term horizon.  Given the small and open nature of our economy and our dependence on trade, the exchange rate has a significant influence on domestic prices which, in turn, is critical for the economic decisions of households and businesses.

2. In April 2010, MAS announced that it would shift to a modest and gradual appreciation of the S$NEER policy band, in addition to an upward re-centring of the band.  This effectively implies a tighter monetary policy stance.  This policy decision is appropriate, considering that the Singapore economy has recovered strongly from the global financial crisis and is expected to continue on a firm path, given improved prospects in the external environment.  At the same time, domestic inflationary pressures are likely to pick up in tandem with the rise in global commodity prices and domestic costs.  Moreover, the effects of the shift in policy stance work with a lag, and economic activity is already beyond pre-crisis levels.  Thus it is timely to unwind the policy that was put in place during the downturn, and return to a gradual and modest appreciation of the exchange rate.  The adjustment to the monetary policy stance at this juncture will thus ensure that economic growth is sustainable going forward.

3. There are two main ways a stronger Singapore dollar will impact the domestic economy.  First, the majority of products we consume and use in production are imported from abroad.  A stronger exchange rate will, therefore, reduce the cost of these imported goods for both consumers and producers.  Second, the stronger S$ will help moderate external demand for our goods and services and ease the demand for domestic resources, such as commercial and industrial space, as well as labour inputs.  This will help prevent domestic business costs, such as wages and rentals, from rising too rapidly and ensure overall macroeconomic stability.

4. In the longer term, the steady appreciation of the exchange rate is in line with our strong economic fundamentals.  It keeps inflation low and stable, which helps to preserve the purchasing power of Singaporeans’ income and savings.  It also provides a stable and conducive environment for businesses to undertake long-term investments, thus enhancing competitiveness and providing the basis for sustained quality economic growth for Singapore.

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1 comment
David Koh says 9 years ago

Hey Martin,

This post was quite an interesting one for me :). However, there are somethings that I do not really understand. Could you please explain what does “This effectively implies a tighter monetary policy stance” mean?

Thanks,
David.

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