The Monetary Authority of Singapore has announced at its meeting today that it will adjust current monetary policy settings. 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 reduced the slope of the policy band in order to target a more modest and gradual pace of appreciation.

Incoming data since the previous MAS meeting mid-November have shown a sharp deceleration in GDP growth in the three months to December and volatility in external demand. Core inflation has moderated from 2.1 percent in October to 1.9 percent in November and 1.8 percent in December.

Officials expect domestic growth to moderate this year and expressed greater uncertainty about the global outlook. They also expect core inflation will be more subdued that previously forecast, revising down their forecast for it to average between 1.5 percent to 2.5 percent in 2025 to a forecast of between 1.0 percent and 2.0 percent. Based on this assessment, officials concluded that an adjustment in policy settings was required to ensure medium-term price stability.

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.