SINGAPORE - The Monetary Authority of Singapore (MAS) said on Monday (March 30) that it will set the rate of the Singapore dollar's appreciation to zero per cent at the prevailing lower level of its exchange policy rate band, given that the economy will enter a recession this year.

The policy easing was widely expected by analysts after the Government forecast the economy will shrink by 1 per cent to 4 per cent this year.

"GDP growth will eventually recover following the abrupt downshift in the level of activity, but there is significant uncertainty over the depth and duration of this recession," the MAS added.

What are monetary policies?

Monetary policies aim to control inflation, among other economic objectives.

They can also be an indicator of how optimistic the central bank is about the economic outlook.

For example, in an economic downturn, the central bank might want to depreciate the currency to make its exports more attractive to foreign buyers.

But such a move will also cause imports to be more expensive for residents.

What is the monetary policy in Singapore? What is the S$NEER?

In Singapore, the MAS is the central bank that regulates the Singapore dollar by guiding its value against a basket of currencies, which it does not reveal to prevent speculation.

Its aim is to maintain price stability conducive to sustained growth of the economy.

The MAS sets boundaries, or what it calls a policy band, within which the Singdollar's value is allowed to appreciate and depreciate.

The basket of currencies against which the Singdollar is managed is called the Singapore Dollar Nominal Effective Exchange Rate or S$NEER.

The MAS intervenes as needed to keep the Singdollar's value within the band's boundaries. This means it will buy or sell the currency to return the value of the Singdollar to its existing confines.

At its semi annual meetings, it may also change the slope, width and mid-point of the policy band based on assessed risks to the country's growth and inflation. These meetings typically happen in April and October, unless otherwise necessary. MAS brought forward its April statement to March 30.

So what did MAS do this time?

MAS did two things yesterday: It set the Singdollar rate of appreciation at zero by flattening the slope of the band.

A sharper slope translates to a quicker appreciation of the Singdollar.

The MAS' move on Monday (March 30) means that the Singdollar will generally be stable against the basket of currencies.
MAS also allowed the market to lower the mid-point of the band.

MAS also allowed the market to lower the mid-point of the band.

MAS said it will adopt a 0 per cent appreciation path for the Singdollar starting at the prevailing level of the S$NEER, which has already weakened to a level slightly below the mid-point of the policy band."

"This policy decision hence affirms the present level of the S$NEER, as well as the width and 0 per cent appreciation slope of the policy band going forward, thus providing stability to the trade-weighted exchange rate," the MAS said.

There was no change to the width of the band, which controls how far the Singdollar can fluctuate.

What does the MAS move mean for you and me?

The MAS' mandate is to maintain price stability, so its job is to ensure that residents are not shocked by sudden increases or decreases in price, CIMB Private Banking economist Song Seng Wun said.

"The sharp pullback in economic activity, which overall, coupled with the pullback in demand, will have implications on prices," he added.

The policy move should, hopefully, shield the man on the street from any sudden major price changes which can change economic behaviour, Mr Song said.

"For the average person on the street, the MAS policy shift should not have any immediate impact on their daily lives," he said.

He noted that the existing market forces have already caused the Singdollar to drop below the midpoint of the S$NEER, even before MAS announced its move.

By flattening the slope and letting the currency crawl along the lower path, the MAS is hoping to keep prices stable, he added.

Associate Professor Lawrence Loh at the National University of Singapore Business School said that "the depreciation of the Singapore dollar will make imported goods more expensive but this can be mitigated by higher economic growth and higher consumer spending power".

"It is good that our inflation has been low in recent months so the impact on overall prices may not be too big," he added.