Want To Know How Singapore Manages Monetary Policy Differently From Everybody Else?

Get a load of this analysis from Morgan Stanley (Excerpts):

To Tighten or Not to Tighten?

Market conditions are not forcing the MAS's hand in tightening the currency policy either. Based on our model, the S$NEER has been tracking in the upper half of the bandwidth since the last monetary policy review in Oct-09 - but not pushing against the upper band as yet. Indeed, the S$NEER has been quite range-bound, broadly moving sideways since Oct-09 before trending down in Dec-09, then trending up again from the second week of Feb-10. It now stands marginally below the levels seen at the Oct-09 review, at roughly 1% above the midpoint of the bandwidth. From a balance-of-payments perspective, the appreciation pressures on S$NEER seem to have abated somewhat. Foreign reserves in Feb-10 have fallen slightly to US$187.8 billion from a peak of US$189.6 billion in Jan-10. Indeed, the monthly trailing accretion rate in the past three months has been somewhat patchy compared to the three months prior.

Separately, our conversations with our currency traders also suggest that the MAS's action in the currency market recently has been mainly smoothing operations rather than aggressive intervention or leaning-against-the-wind.

As a side note, one possible way in which the MAS could curb inflation pressures, so far primarily external cost push-related, without compromising on growth would be to re-center the midpoint of the bandwidth higher to the prevailing level of S$NEER but still retain the zero appreciation slope. This is possible but not probable, in our view.

Recall that during the boom years of 2004-07 when the economy showed signs of overheating, the MAS ran a gradual and modest appreciation stance and only increased the S$NEER slope in Oct-07 when inflation went above 2%. This time round, trailing inflation is still low and together with the poor growth visibility, we doubt that the MAS will take action to curb import-led inflation, given the low starting point on inflation at this stage.

Singapore adjusts the monetary policy stance wholly through changes in the exchange rate, unlike the more common interest rate/inflation rate-based targeting used virtually everywhere else. It works for them simply because the scale of trade is so much bigger in relation to their economy, and because they have virtually no natural resources of their own.

One consequence is that because the exchange rate functions as the policy instrument, both interest rates and money supply are fully market determined, and hence also highly volatile. It’s a case of picking your poison, but it works for them (and not necessarily for anybody else).