MAS 'will continue twice-yearly S$ review'

MAS 'will continue twice-yearly S$ review'
International Monetary Fund managing director Christine Lagarde and International Monetary and Financial Committee (IMFC) chairman Agustin Carstens presenting a resolution of appreciation from the IMFC to DPM Tharman Shanmugaratnam, whose four years at the helm of the IMFC have ended, in Washington on Saturday.

Singapore is sticking to the twice-yearly review of its foreign exchange policy, Deputy Prime Minister Tharman Shanmugaratnam said, dismissing suggestions that the unexpected shift by the Monetary Authority of Singapore (MAS) in January marked a more fundamental change in how the Government manages the economy.

Investors and economists have been caught off-guard twice this year by MAS, which adjusted the foreign exchange band in January, when no one expected it to, and then maintained the status quo last week, when many anticipated another change.

Some analysts even suggested that the Government would increase the frequency of its monetary policy statements - made every April and October - due to a more uncertain macroeconomic outlook.

Speaking on the issue for the first time since the announcements, DPM Tharman, who is also Finance Minister, said it did not make sense for the foreign exchange policy to be changed too often.

"We are already providing for fluctuations within the band, and to change the band often would be most unwise. It will lead to too much uncertainty, too much front-running each time people anticipate a change, and the uncertainty isn't going to help the markets or the economy," he said, noting that having an exchange rate band requires less frequent tweaks than trying to maintain an interest rate.

MAS uses an exchange rate policy as its monetary policy tool, unlike many other central banks, which use interest rates. Mr Tharman stressed that the policy is focused on the medium term.

"Our time horizon when we think through the implications of exchange rate policy is basically two to three years. It is not about the next six months. It is a two- to three-year perspective.

"And the reason is that there are long lags between the changes in exchange rates and actual inflation and growth. So, it is not a good idea to revise our policy often because it takes a long time to have an effect to begin with," he said.

"The policy is working quite well... Only twice have we had to announce a change in the band outside our six-monthly cycle."

These were in October 2001, when the bubble burst, and in January this year because of plunging oil prices.

In a wide-ranging interview with Singapore media, Mr Tharman, who was in Washington for the International Monetary Fund-World Bank meetings, also gave a broad outlook for the global economy.

He said the predominant concern among leaders at the summit was not so much the short-term shocks that would come when the US Federal Reserve raises interest rates, but the build-up of financial risks caused by having had low interest rates for so long.

"The key issue concerns the risks of not normalising - the consequences of keeping interest rates where they are and sticking with a very easy monetary policy over a long period, in the US, in Europe and Japan."

Mr Tharman said the unprecedented period of low interest rates had come at a cost - higher risk because of investors putting money into less-safe assets in search of yield, pension and insurance funds put at risk of insolvency in the long term, and the fact that interest rates could no longer be used to deal with business cycles.

He added that politicians had put off more politically difficult structural and fiscal reforms and simply relied on monetary policy.

"It is critical at this stage of the recovery, if we want to sustain the recovery without building up risks in the financial system, we have to shift the balance of responsibilities away from a very strong focus on monetary policy by central banks towards fiscal reforms and, critically, structural reforms," he said.


This article was first published on April 20, 2015.
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