What the Reduction of the Singapore Appreciation Rate Means
by CashOctopus • November 29, 2019
What the Reduction of the Singapore Appreciation Rate Means? Different central banks around the world use various strategies to control the rate of inflation in their respective countries. Some governments prefer to use the instrument of interest rates to tame inflation. However, the Monetary Authority of Singapore prefers to use the control of the exchange rate of the Sing dollar currency against other major world currencies to stabilize prices of goods and services in the country.
The Singapore Dollar Nominal Effective Exchange Rate (S$NEER) can be described as the exchange rate between the Sing dollar and the currencies of other countries who are major trading partners of Singapore.
The Monetary Authority of Singapore routinely reviews the Singapore Dollar Nominal Effective Exchange rate policy band twice a year, in April and October. This is done primarily to control the rate of inflation and to ensure the stability of the prices of goods and services in Singapore for a season of time.
The Central Bank of Singapore uses this strategy in the following ways:
- The Monetary Authority of Singapore usually makes slight adjustments in the slope of the policy band, and in some cases they may also adjust the width of the band. The Sing dollar will appreciate faster if the policy band is made This is usually done during times of high inflation. The Sing dollar will become stronger, which means that imports will become cheaper and this will prevent a further increase in the prices of goods and services in the country.
- If inflation rate is low or negative, the Monetary Authority of Singapore will reduce the slope of the band so that the Sing dollar appreciates at a slower pace.
- The value of the Sing dollar is allowed to fluctuate against other major currencies but only within the set band so that inflation rates are kept in check.
The Central Bank in Singapore has recently made a move to slightly reduce the appreciation rate of the Singapore Nominal Effective Exchange Rate policy band. However, the width band of the policy will not change. Financial experts say that this move was expected, considering the challenging current economic situation in Singapore. This reduction has been done mainly for the following reasons.
- There has been a marked decline in the rate of economic growth in Singapore in recent This has been mainly due to a slowdown in global economies as well as strains in trade relations between Singapore and other major economies like the United States and China. The Monetary Authority of Singapore has adopted the strategy in hopes that it will begin to improve the rate of economic growth in the country. However, it should be noted that this strategy may take time to have a positive impact on economic growth in Singapore. This is because the effects of other dwindling global economies will still have a negative effect on the economy.
- The Monetary Authority of Singapore has decided to use the exchange rate of the Sing dollar to stabilize prices in Singapore because this has proven to be more effective than using interest rates. S$NEER has a direct influence of the prices of several sectors in the economy. These include the prices of imports, the prices of exports, the wage rates of employees, rental rates and even prices of consumer goods.
Once the prices of goods and services in the country have stabilized, it is expected that the economy of Singapore will continue to grow steadily. With the recent move to reduce the appreciation rate of the Singapore Dollar, the rate of core inflation is expected to remain subdued for a period of time.
- The reduction of the appreciation rate policy band will also have the effect of making imports more expensive once they are converted into Sing dollars. This should have the ripple effect of increasing demand for locally made goods. An increase in demand for goods made in Singapore will also create an increase in the investment opportunities within the country, which will in turn lead to a rise in employment opportunities. This will eventually result in a positive rate of growth in the economy. However, experts still warn that it may take time for the demand for locally-made goods to go up. This is because there are other external factors apart from prices that may affect the global demand for these goods, such as the political environment in some countries. There is also the concern that the volume of exports from Singapore may not be sufficient to meet the demand of both the local and the overseas market.
This move to reduce the appreciation rate of the Sing dollar is not expected to have any direct effect on ordinary Singaporeans. However, the effect of the negative global economic conditions should be a major concern for most Singaporeans. This is because the decline of major global economies will have a negative impact on the economy of Singapore. This could lead to loss of businesses as well as loss of jobs.
The following are some of the challenges that may be experienced while implementing this strategy.
- The reduction of the Sing dollar appreciation rate could be successful in causing a decrease in the price of locally made goods. However, this may not necessarily mean an increase in the demand for exports from Singapore. The demand for goods from Singapore could also be influenced negatively by other factors such as strained trade relationships with key countries.
- Inspite of the reduction in the slope of the appreciation rate policy band, the Sing dollar has still been experiencing some appreciation. It has been fluctuating at the upper levels of the band rate for several months. Therefore, this strategy is not fool proof and it may take some time for the desired effects in the economy to be realised.
- Some experts have said that not all sectors of the economy will be affected by this strategy to reduce the appreciation of the Sing dollar exchange rate. Therefore, the impact will be limited.
In conclusion, if Singapore’s economic situation does not improve after implementing this strategy, the Singapore government will need to come up with other fiscal policies to salvage the situation.