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Not a rapper's name: What is the S$NEER and how is it used in monetary policy?

SINGAPORE — The Monetary Authority of Singapore (MAS) said on Friday (April 12) that it was leaving Singapore’s monetary policy unchanged amid a slowing economy and mild inflation.

Not a rapper's name: What is the S$NEER and how is it used in monetary policy?

The Monetary Authority of Singapore uses the currency exchange rate to ensure prices of goods and services remain stable. It does this by making adjustments to the exchange rate's "policy band" when necessary.

SINGAPORE — The Monetary Authority of Singapore (MAS) said on Friday (April 12) that it is leaving Singapore’s monetary policy unchanged, as the economy slows and there is mild inflation.

For those unfamiliar with economic jargon, the announcement might have been impenetrable: “MAS will maintain the current rate of appreciation of the S$NEER policy band. There will be no change to its width and the level at which it is centred.”

TODAY breaks down what these sentences really mean.

WHAT IS THE S$NEER?

This is the Singapore Dollar Nominal Effective Exchange Rate — the exchange rate between the Singdollar and a basket of currencies of the country's major trading partners.

Most central banks in other countries use interest rates as a monetary policy tool, adjusting them higher or lower depending on economic growth and outlook. Singapore does not. Instead, the MAS uses the currency exchange rate to ensure prices of goods and services remain stable.

This is because Singapore has a small and open economy, where gross exports and imports of goods and services are more than 300 per cent of gross domestic product, and almost 40 cents of every dollar spent domestically go to imports.

Thus, the exchange rate has a much stronger influence on inflation than the interest rate, and therefore is a more effective tool for maintaining price stability.

The S$NEER, directly and indirectly, affects a wide range of prices in the economy here, such as import and export prices, wages and rentals, consumer prices and output prices.

HOW IS IT USED AS A MONETARY POLICY TOOL?

MAS manages the strength of the Singapore dollar against this basket of currencies — which MAS does not disclose — along a “policy band”. Picture two parallel lines gently sloping upwards. That’s the policy band.

The Singdollar is allowed to appreciate or depreciate against this basket of currencies, as long as it stays within this band. The MAS intervenes as needed to ensure that it does.

So, if the value of the Singdollar steps outside of the band, MAS will buy or sell as much of the currency as is needed to get it back within the band.

At each monetary policy review in April and October, the MAS also decides whether it will make adjustments to the band’s slope, width or centre.

THE SLOPE OF THE BAND

If the MAS decides to sharpen the band’s slope —  making those parallel lines move upwards at a steeper angle — this will allow the Singdollar to appreciate faster.

This is typically done when inflation is high. A stronger Singdollar will make imports relatively cheaper, and ensure that consumers will not see a sudden spike in the prices of goods and services.  

Conversely, if inflation is low or negative, the MAS might reduce the slope of the band, which will make the Singdollar appreciate at a slower pace.

In September 2008, United States investment bank Lehman Brothers collapsed, triggering a global financial crisis. The following month, MAS flattened the slope of the band altogether — effectively ensuring that the Singdollar could not appreciate at all.

As it stands now, the policy band is on a mild upward trajectory, paving the way for a “modest and gradual appreciation” of the Singdollar.

THE CENTRE OF THE BAND

A more significant adjustment in monetary policy will involve fully shifting the band upwards or downwards, or in monetary policy speak, “re-centring” it.

MAS said that this may happen in the event where “the outlook for growth and inflation changes abruptly and rapidly, and both are projected to have fundamentally shifted to a new path”.

For example, the band was moved downwards in April 2009 during the financial crisis, which triggered an economic recession and a sharp fall in inflation in Singapore. By re-centring the band downwards, MAS was effectively devaluing the Singdollar.

It was a move aimed at stimulating the economy during tough times. A weaker Singdollar means Singapore’s exports would be cheaper to foreign buyers, thus making them more competitive on the global market.

However, MAS shifted the band to a positive slope and simultaneously re-centred it upwards in April 2010, following a strong rebound in Singapore’s economic growth and a recovery in inflation.

THE WIDTH OF THE BAND

The MAS can also adjust the width of the policy band — how far apart those two parallel lines are.

The band is widened when financial markets are experiencing greater volatility, there is more uncertainty about the outlook for economic growth and inflation, and MAS expects the situation to persist.

“A wider band allows more room for market-determined movements during the period of uncertainty,” MAS said.

That is to say, as the band is widened, the Singdollar is allowed to appreciate to higher levels, and depreciate to lower levels, than is usually the case. This gives it more flexibility to manage the exchange rate.

This was done, for example, in October 2001 after the Sept 11 terrorist attacks in the United States, which led to massive volatility in financial markets.

THE LATEST POLICY ANNOUNCEMENT

Now read it again: “MAS will maintain the current rate of appreciation of the S$NEER policy band. There will be no change to its width and the level at which it is centred.”

Basically, MAS is not making any changes at all to the slope, width or centre of the band.

This comes after MAS made adjustments in April and October last year, both times to increase slightly the slope of the policy band.

Both times, it did so because the Singapore economy was projected to expand steadily and core inflation was expected to rise.

So, the slope was increased so that the Singdollar would appreciate more. This so-called tightening of the monetary policy was aimed at easing the pressure of rising prices — a stronger Singdollar means imported goods and services are relatively cheaper.

On Friday, MAS said that Singapore’s economic growth has now eased and despite some pickup in labour costs, inflationary pressures are “mild and should remain contained”. Hence, MAS has kept to its previous stance of a mild appreciation and refrained from further tightening.

Related topics

MAS monetary policy central bank economy currency

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