The Monetary Authority of Singapore has today announced it will retain current monetary policy settings at its scheduled semi-annual meeting. The MAS pursues its inflation and growth objectives by adjusting the direction, slope, width, and central level of an undisclosed"band" around its measure of Singapore's nominal effective exchange rate. Officials today left those parameters unchanged in order to target the prevailing rate of appreciation in the exchange rate.

Concerns about the inflation outlook had prompted the MAS to tighten policy at its two scheduled semi-annual meeting in April and October 2022 but also at two unscheduled meetings in January and July last year. Headline inflation has moderated since the last policy meeting and although core inflation has remained relatively steady at around 5.0 percent in recent months, officials expect it"to slow more discernibly in the second half of this year" to around 2.5 percent".

GDP data also published today show Singapore's economy contracted in the three months to March, with weakness in manufacturing outweighing improved conditions in the services and construction sectors. Officials now judge that the outlook for domestic growth has"dimmed", with weaker global activity expected to weigh on external demand, and higher prices and interest rates expected to weigh on domestic demand. They now forecast Singapore's GDP will grow by between 0.5 percent and 2.5 percent in 2023, down from 3.6 percent in 2022, and they also caution that"the domestic economic slowdown could be deeper than anticipated".

This assessment that core inflation is likely to moderate and growth weaken has persuaded officials that further policy tightening is not required at this stage. They argue that the effects of previous tightening"are still working through the economy and should dampen inflation further" and it is clear that concerns about the growth outlook are now playing a bigger role in their policy decisions.

The Monetary Authority of Singapore conducts monetary policy by managing a trade-weighted nominal effective exchange rate, reflecting Singapore's status as a small and open economy highly dependent on global trade and capital flows. This exchange rate is allowed to fluctuate within a policy band, with officials adjusting the slope, width, and central level of the policy band in order to maintain price stability. Although the MAS does not have an explicit inflation target, MAS officials consider that keeping core inflation just under 2.0 percent is consistent with overall price stability in the economy.

Officials review policy every six months in April and October but are also prepared to make adjustments at other times as required. Adjustments that strengthen the exchange rate are equivalent to a tightening of monetary policy, while adjustments that weaken the exchange rate are equivalent to a loosening of monetary policy.

The exchange rate affects the economy in a significant way, particularly for a small and open economy like Singapore. A stronger exchange rate tends to slow economic activity by making exports more expensive to foreigners, while a weaker exchange rate tends to stimulate economic activity by making exports less expensive to foreigners. The exchange rate also has a direct and indirect effect on prices in the domestic economy, with a stronger exchange rate tending to restrain inflation and a weaker exchange rate tending to push up inflation.