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On the news last week, the Central Bank of Singapore, MAS announced it will make two adjustments to its monetary policy in increasing the slope of the appreciation path and widening the accepted trading band for SGD. What does this mean in the classic IB or “A” levels Economics context?
Background info
The general stance of MAS is to benchmark SGD against a basket of our trading partners, weighted by the volume trade they do with Singapore (https://www.singstat.gov.sg/modules/infographics/singapore-international-trade), and to let the SGD appreciate gradually against our partners (https://www.mas.gov.sg/monetary-policy).
This is to ensure that the value of SGD does not go off tangent in its own world and puts us in good shape against cost push inflation since we import more than we export (stronger SGD = cheaper imports = higher standard of living). However, it does mean our exports are less competitive from a price point perspective hence our philosophy of trade and industries has generally been more our high value goods (goods that that low-cost competitors will find hard to copy/compete on).
Current Backdrop
Due to multiple factors, the cost of goods has increased quite a bit recently and this has caused our imports to become more expensive (cost push inflation). Cost push inflation (in contrast to demand pull inflation) is of course bad as we will be buying less for the same $ amount, which lowers our standard of living and we may even cut down on our non-essential expenses to save more in anticipation of greater price increase in future, which will obviously lead to a lowering of economic activity in society.
Increase the SGD appreciating path
The graph below is my graphical interpretation of the policy (the vertical axis should be SGD against trading partners currencies). But increasing the slope of the appreciating path MAS is opting to increase the value of SGD faster (or you can interpret it as letting it appreciate more by a certain timeframe). Please note that it probably won’t be a straight-line path, the exact curvature depends on many other forces (market forces being one of them).
Widening the appreciating band
But controlling one’s currency is not rocket science, it can’t be so accurate and follow exactly what the central bank decides as there are more uncontrollable than controllable as Singapore is an open economy. As a result, MAS has a certain bandwidth that is it comfortable letting the SGD trade within before (the yellow). Following last week’s announcement, they will be widening the bandwidth now too (to the blue).
Sensible moves, we can analyse all these from a forex trading perspective but that’s not the point of my article here.
To summarise, SGD will appreciate, imports should get cheaper (yay) or less expensive. Exporters will sweat a bit more or lower their profit margins.
Above are all my opinions and thoughts in digesting the latest announcements and trying to help kids relate to their Econs syllabus. Any mistakes are all mine, happy to engage in discussion!
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